Why high interest rates are bad for REITs? (2024)

Why high interest rates are bad for REITs?

While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard. Rising interest rates hurt not only the value of REITs' property holdings but also the cost of debt to finance those properties or even refinance already-owned assets.

Why are REITs losing value?

Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.

What are the dangers of REITs?

Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.

Why do REITs do well in inflation?

REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.

Have REITs outperformed the S&P 500?

During the past 25 years, REITs have delivered an 11.4% annual return, crushing the S&P 500's 7.6% annualized total return in the same period. Image source: Getty Images. One reason for REITs' outperformance is their dividends.

Do REITs lose value when interest rates rise?

Rising interest rates hurt not only the value of REITs' property holdings but also the cost of debt to finance those properties or even refinance already-owned assets.

What happens to REITs when interest rates go down?

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

Are REITs safe during a recession?

By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions. Typically, the upfront costs of investing in a REIT are low, while their risk-adjusted returns tend to be high.

Can REITs lose value?

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.

Are REITs a good investment in 2024?

April 2, 2024, at 2:50 p.m. Real estate investment trusts, or REITs, are a great way to invest in the real estate sector while diversifying your options. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.

Do rising interest rates help REITs?

REIT Stock Performance and the Interest Rate Environment

Market interest rates typically increase during periods when macroeconomic conditions are strengthening, the same strengthening that often drives positive REIT investment performance.

Why are REITs struggling?

Two of the primary factors contributing to the recent underperformance of REITs are the rising interest rates and the recent bank failures. However, the fundamentals of many of these REITs remain strong. Their performance is tied more to stock market fears than the actual performance of the real estate market.

Will REITs ever recover?

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.

How do you tell if a REIT is overvalued?

Net Asset Value (NAV) is associated with the value of its underlying real estate assets, minus by the value of its liabilities. It is frequently calculated and compared to Mark to Market, this ratio gives an indication of whether the REIT is currently overvalued or undervalued with respect to its intrinsic value.

Which REIT has the best returns?

Can REIT beat inflation?

Invest in the asset class that can beat inflation over the long term and investing in equities through mutual funds is the best way to achieve this. If you do not invest, then you are essentially allowing inflation to take away your hard-earned money from you.

Do interest rates hurt REITs?

Interest Rates. During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

Can REITs go to zero?

But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.

Will REITs go up in 2024?

The trend started to reverse in late 2023, with the REITs posting a 17.9% return for the fourth quarter. And it will likely continue in 2024 as multiple factors converge to create a favorable environment for the sector, according to REIT fund managers.

Why are REIT stocks falling?

Higher interest rates pose a problem for Realty Income

First, like most REITs, Realty Income relies on borrowing money to buy new properties and expand its business. As borrowing costs go up through higher interest rates, it becomes more expensive for the company to finance its expansions.

Why is realty income falling?

Shares of the REIT fell on a higher-than-expected inflation report. Realty Income (O -0.42%) tends to be a low-volatility stock. After all, the company is a Real Estate Investment Trust (REIT) that specializes in triple-net leases to recession-proof tenants in mostly stand-alone locations.

What is bad income for REITs?

For purposes of the REIT income tests, a non-qualified hedge will produce income that is included in the denominator, but not the numerator. This is generally referred to as “bad” REIT income because it reduces the fraction and makes it more difficult to meet the tests.

Can REITs pass through losses to investors?

Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs.

Should I invest in REITs now?

With rate cuts on the line in the coming year, dividend yields for REITs are likely to be on the attractive side compared with the yields on fixed-income and money-market accounts. This will make REITs desirable to investors.

What I wish I knew before investing in REITs?

A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.