Saturday, January 20, 2018

REITs Value When Interest Rates are Rising

Comments on: Debunking REIT Interest Rate Myths

Well argued. I am new to investing in REITs as an investor but I agree that the "conventional wisdom" doesn't make sense. I primary have dipped into only apartment REITs.
As with many misleading claims there is some truth behind the claims about REITs and interest rates.
It seems to me that the 3 biggest explanations for REITs declining if interest rates rise are
  1. lowered value of REIT assets - this one makes the least sense to me. I get the cash flows (if they are set for years into the future) will be given less value but for my particular focus (apartment REITs) the cash flows could well increase (over the longer term) as the same factors causing rates to rise allow rental rents to be increased.
  2. lower value of the current yield - this makes perfect sense, though it seems to me it vastly under-values the real LONG TERM impact. For a bond this is just true that the value of the future payments are worth less if interest rates rise. But for REITs if rates rise do to a stronger economy and thus they are able to raise rents and raise dividends then you do see a drop in the value of near term dividends but in the longer term it is much less straight forward. It may well be that the gains for the REIT in the long term exceed the lowered value of the reduced value this years dividends (though it may also be true that the payments do not increase to even out the comparison to new expected yields). This will of course be dependant on the REIT type and individual REIT portfolio.
  3. As you say the increased costs do to higher rates are not baked into all REITs. It does seem to me (again I am new to REITs) that they often are going to experience higher costs but it isn't immediate. As you say often they have fixed rates but also it seems (again maybe I am wrong) they often have fairly high amount of debt coming due in say the next 5 years that has to be rolled over - and also new purchases will have these higher rates.

Related: Looking at Real Estate in This Challenging Investing Climate (2015) - Looking for Yields in Stocks and Real Estate (2012) - Landlords See Increase in Apartment Rentals (2010)

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