What happens to REITs when interest rates go down?
With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.
Utilities stocks are defensive dividend-payers. In terms of investment dollars, they compete with bonds. Bonds become less attractive when interest rates drop. That, in turn, increases the relative appeal of utilities and their dividend payments.
Right now, REITs (VNQ) are at an inflection point and time is running out for investors. But now as we head into 2024, we expect the polar opposite and this should lead to an epic recovery across the REIT sector. The Fed expects at least 3 interest rate cuts in 2024 and the market is predicting even more.
But despite that, most REITs have kept growing their dividend. Most of them hiked in 2022, 2023, and will hike again in 2024. This is the ultimate proof that REITs are doing better than what the market appears to believe.
The REIT has a Zacks Rank #2 at present. The Zacks Consensus Estimate for the retail REIT's 2023 FFO per share has been unchanged over the past month. Despite this, the estimate figure suggests year-over-year growth of 2.3%.
- High-yield investments.
- Bond ETFs.
- Preferred stock.
- REITs.
- Housing stocks.
As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
“The next two years, 2024 and 2025, will have more commercial real estate debt due to be refinanced in the history of CRE, that will cause some assets to be lost as values have decreased as interest rates have gone up,” Chancey said.
Can REITs go out of business?
While REIT bankruptcies are rare -- and may not lead to a complete loss of shareholder value, as seen following the 2009 General Growth Properties bankruptcy -- REIT stocks can go to zero.
Because REITs use debt to purchase investments, rising interest rates could mean these companies would have to pay more interest on future loans. This could in turn reduce their return on investment. Because of this, REITs could potentially lose value when interest rates rise.
REIT 12 Months Forecast
Based on 31 Wall Street analysts offering 12 month price targets to REIT holdings in the last 3 months. The average price target is $28.05 with a high forecast of $31.48 and a low forecast of $24.01. The average price target represents a 13.04% change from the last price of $24.81.
After looking at correlation patterns and historical data, it appears that returns from REITs vary during different interest rate periods, but for the most part have shown a positive correlation during increasing interest rates.
He says: “Our analysis shows REITs perform very well historically in periods of high inflation. I could easily see global REIT returns in the low double-digits over the next 12 months – and if the economic situation turns out to be more positive it could be considerably more than that.”
In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023. Based on historical experience, the convergence of the wide valuation gap between public and private real estate will likely ensure continued REIT outperformance into 2024.
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Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.
Is it good to buy stocks when interest rates are high?
A higher interest rate environment can present challenges for the economy, which may slow business activity. This could potentially result in lower revenues and earnings for a corporation, which could be reflected in a lower stock price.
What to expect from mortgage rates in 2024. Mortgage forecasters base their projections on different data, but most housing market experts predict rates will move toward 6% by the end of 2024. Ultimately, a more affordable mortgage market will depend on how quickly the Fed begins cutting interest rates.
Mumbai: Real Estate Investment Trusts (REITs) listed on domestic stock exchanges have largely been forgettable bets for many investors in 2023 so far as a delay in the pick-up in commercial real estate, a slowdown in the IT sector, and higher interest rates have capped returns.
It is generally accurate to say that individual Real Estate Investment Trusts (REITs) are less likely to go to zero compared to individual stocks, primarily because REITs are invested in real estate properties and real estate typically retains some non-zero value.
Rising interest rates since the start of 2023 have hurt REITs because the cost of capital rises. COVID-19 also has had a long-term impact on commercial real estate as more employees are working from home, driving down the occupancy of office buildings in cities.
