Do REITs do better with lower interest rates?
Low interest rate = low interest expense and higher net income. REITs borrow money to buy properties, so in a low interest rate environment their interest expense is low. Leverage is a good thing. Tenants borrow money and when interest is low they are more likely to pay their rent.
This is because when interest rates rise, it becomes more expensive for Reits to borrow money to refinance their loans, resulting in an erosion of their dividends. On top of that, returns from yield products like fixed deposits and government Treasury bills were also on the rise, competing for investors' capital.
Investors and economists alike view lower interest rates as catalysts for growth—a benefit to personal and corporate borrowing. This, in turn, leads to greater profits and a robust economy.
Falling interest rates often go hand-in-hand with rising earnings, which historically has particularly benefited cyclical sectors. The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise.
Therefore, if rates begin to rise then REIT cash flows will decline at a time when discount rates are rising. They fear the end result will be capital losses that offset the higher distribution yield and result in negative total returns.
REITs historically perform well during and after recessions | Pensions & Investments.
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.
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.
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.
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.
Who benefits most from high interest rates?
With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.
Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.
Rate cuts typically stimulate the economy because companies are more willing to invest, which bodes well for the labor market. “Having lower interest rates means firms are able to hire employees and invest in projects,” Davies said. Still, there could be economic curveballs in 2024.
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Unexpected inflation creates winners and losers, and borrowers definitely benefit when unexpected inflation results in them paying lower real interest rates. Lenders, on the other hand, are the losers in this case and are not satisfied with the lower real rate.
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.
| Symbol | Fund name | 1-year return |
|---|---|---|
| BRIUX | Baron Real Estate Income R6 | 12.08% |
| JABIX | JHanco*ck Real Estate Securities R6 | 11.07% |
| RRRRX | DWS RREEF Real Estate Securities Instil | 9.26% |
| CSRIX | Cohen & Steers Instl Realty Shares | 9.84% |
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
In recessions, interest rates fall. Normally bullish for REITs—consider them a “second-level” bet on a bond bounce. REITs, after all, are the bond proxies of the stock world. Investors buy them for their yields.
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.
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.
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.
- High-yield investments.
- Bond ETFs.
- Preferred stock.
- REITs.
- Housing stocks.
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.
