REITs and Interest Rates (2024)

Rising interest rates and expectations of future changes in monetary policy have at times impacted the share prices of equity REITs. However, increases in interest rates often are driven by economic growth that may support the growth of REIT earnings and dividends in the future. Research shows that REITs returns have generally been positive and have often outperformed the S&P 500 in periods of rising interest rates.

REITs and Interest Rates (1)

REIT Stock Performance and the Interest Rate Environment

REIT share prices, like the broader stock market, often react to changes in the outlook for interest rates, including both the short-term rates set by the Federal Reserve and the long-term rates that are governed more by market forces.

Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals. Market interest rates typically increase during periods when macroeconomic conditions are strengthening, the same strengthening that often drives positive REIT investment performance. Strengthening macroeconomic conditions typically lead to higher occupancy rates, stronger rent growth, increased funds from operations (FFO) and net operating income (NOI), rising property values and higher dividend payments to investors.

The figure below illustrates the relationship between the four-quarter change in the 10-year Treasury yield and the four-quarter total return on the FTSE Nareit All Equity REIT Index. REITs posted positive total returns in 82% of months with rising Treasury yields over the period Q1 1992 to Q4 2022.

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REITs have also outperformed broad equity indexes during many of these periods of rising interest rates. The figure below illustrates the relationship between the four-quarter change in the 10-year Treasury yield and the difference between four-quarter total return on the FTSE Nareit All Equity REIT Index and the S&P 500. This illustration reveals that REITs outperformed the S&P 500 in over half of the episodes of rising Treasury yields over the period Q1 1992 to Q4 2022.

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REITs are Prepared to Perform in a Rising Rate Environment

REITs have fortified their balance sheets to position themselves to continue delivering earnings growth in the event of rising interest rates. The REIT industry has continued to maintain lower leverage rates since the recovery from the Great Financial Crisis. Debt-to-book assets was at 50.3% at the end of the first quarter in 2021, holding steady through the pandemic and recovery. The pandemic lowered market values leading to small increases in debt-to-market assets as denominators shrunk. As the economic recovery lifts market values back up, leverage ratios are returning to pre-pandemic levels and debt-to-market assets was at 32.8% by first quarter end.

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The decline in leverage means interest expense takes a smaller bite out of REITs’ earnings. Interest expense was 21.6% of net operating income in the first quarter of 2021, down from 25.7 at the peak of the pandemic.

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Interest expenses also are not likely to rise much as rates move higher, because most of the borrowings of REITs are fixed-rate debt. And, REITs have extended the average maturity of their debt to over 87 months, locking in these low interest rates for years to come.

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Learn more about REITs and interest rates:

REITs and Interest Rates (2024)

FAQs

Does interest rate affect REITs? ›

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 is the 90% rule for REITs? ›

How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.

Is it a good time to buy REITs now? ›

With rate cuts on the horizon, we believe investors have an opportunity to continue investing into S-Reits as the high estimated dividend yield of close to 7 per cent in 2024 will look increasingly attractive.

What is the return rate for REITs? ›

REITs vs. stocks: Digging into the historical data
TIME PERIODS&P 500 (TOTAL ANNUAL RETURN)FTSE Nareit ALL EQUITY REITS (TOTAL ANNUAL RETURN)
Past 20 years9.7%10.4%
Past 10 years12.0%9.5%
Past 5 years15.7%10.3%
Past year (2023)26.3%11.4%
2 more rows
Mar 4, 2024

Do REITs go down during recession? ›

REITs historically perform well during and after recessions | Pensions & Investments.

Is there a downside to investing in REITs? ›

When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.

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.

How much of my retirement should be in REITs? ›

“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.

What is a good amount to invest on a REIT? ›

According to the National Association of Real Estate Investment Trusts (Nareit), non-traded REITs typically require a minimum investment of $1,000 to $2,500.

Will REITs go up in 2024? ›

AEW Capital Management forecasts total REIT returns of approximately 25% over the next two years, which also roughly translates to low double digits in 2024, according to Gina Szymanski, managing director and portfolio manager, real estate securities group for North America, with the firm.

How often do REITs go out of business? ›

There have been very few REIT bankruptcies over the past 50+ years.

Is it better to buy property or REITs? ›

Perhaps the biggest advantage of buying REIT shares rather than rental properties is simplicity. REIT investing allows for sharing in value appreciation and rental income without being involved in the hassle of actually buying, managing and selling property. Diversification is another benefit.

Do REITs pay monthly? ›

REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable.

What are the top 5 largest REITs? ›

Largest Real-Estate-Investment-Trusts by market cap
#NameM. Cap
1Prologis 1PLD$94.48 B
2American Tower 2AMT$80.11 B
3Equinix 3EQIX$67.48 B
4Welltower 4WELL$56.31 B
57 more rows

Which REITs have the highest return? ›

Best-performing REIT stocks: May 2024
SymbolCompanyREIT performance (1-year total return)
DHCDiversified Healthcare Trust162.86%
SLGSL Green Realty Corp.129.09%
UNITUniti Group Inc.88.43%
VNOVornado Realty Trust75.08%
1 more row
5 days ago

Do REITs go up with inflation? ›

REITs tend to outperform in the high inflation periods, with strong income returns offsetting falling REIT prices. On average, REITs outperformed the S&P 500 by 5.6 percentage points during these periods.

Will REITs recover in 2024? ›

Key Takeaways. - With the Federal Reserve at, or near, the end of its tightening cycle, REITs are well-situated for outsized performance in 2024. - The gap between REIT implied and private appraisal-based cap rates will likely close or converge in 2024.

Why have REITs crashed? ›

Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news.

Have REITs outperformed the S&P 500? ›

They've certainly done that over the years. Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500.

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