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Land, Ho! Real Estate Can Thrive Even as Rates Rise

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No investment is a sure thing, but on the current rocky road paved of stocks, bonds and corporate debt, real estate could be a safe haven, or even best opportunity for return. There are several ways to purchase real estate, but real estate investment trusts (REITs) and products built around them such as ETFs can spread the risk of selecting the right land parcel or building over several properties. A newer option is using a crowdfunding LLC platform, which allows investment in specific properties or development via a website.

With the Federal Reserve’s move to raise interest rates, REITs may be well situated on several investment levels. A study published in 2014 by Altegris found unlike bonds, which obviously are interest rate sensitive, REITs are not, but they are a good investment in a rising rate environment, especially in the “modern REIT era. ” This is the period from 1993 on “when Umbrella Partnerships were codified, allowing large real estate companies with low-basis assets to access the public market in a tax-efficient fashion,” note authors Burland East and Creed Murphy in Interest Rates & REIT Performance, Searching for Correlation. These partnerships created larger and professionally managed real estate companies, which are more sophisticated in raising capital and more agile in different credit conditions.

In reviewing 40 years of data, East and Murphy found seven specific periods of Fed fund rate increases in which five of the seven were good for REITs ownership. And the three Fed Fund hikes post 1993 were all positive for REITs investors:

1)     1993-1995, when Fed Funds increased to 6.1% from 2.9% REITs with dividends gained 21%

2)     1999-2000, which saw Fed Funds increase to 6.5% from 4.6%, and REITs including dividends gained 17%

3)     2004-2007, when Fed Funds rose to 5.3% from 1.0%, and REITs with dividends gained 99%.

The report notes: “Unlike other traditional fixed income products, an increase in the Fed Funds rate will not necessarily cause falling [REIT) prices. Rather, strong underlying assets, possible inflation, and increases in growth of key operating metrics drive increases in REIT prices.”

Today, East, who’s CEO and portfolio manager of AACA, the sub-advisor of the Altegris/AACA Long Short Real Estate fund, says that a key reason REITS do so well in a rising rate environment is “cash flows grow with inflation … [and] inflation is good for real estate.”

Stock-exchange listed REITS are one vehicle that provides investors with yield as well as growth and exposure in an improving U.S. economy, says Ashi Mathur, BMO’s head of investment and corporate banking for North American Real Estate. He adds that some attractive REIT areas include health care, senior housing and manufactured housing.

Mathur says that growing M&A activity in the real estate sector as well as REITs being undervalued as a whole make for a prime investment opportunity. Several factors add to REITs’ allure, he explains, including

1)     Strength of balance sheet compared historically

2)     Larger cap REITs have culled portfolios so they are more concentrated on strategic objectives

3)     Management’s focus in last few years to curb operating costs and generate net operating income

4)     Future growth not through acquisitions, but internally, such as repurposing underperforming properties

There are many ways to access the real estate market, but some are simpler than others:

1) Stock-Exchange listed REITs: These can be purchased individually or many are included in the S&P indexes. The 198 REITs that trade on the NYSE have an equity market capitalization of $893 billion, according to

2) REIT ETFs: A way to access a group of REITs in the same category such as health care or residential. Performance of some of these products long term is impressive. For example, the IShares Residential Real Estate Capped ETF (REZ) has returned 88.84% over a five-year period. This year it’s up 7.23%. The Wilshire US REIT ETF (WREI) returned 77.76% over five years, although this year’s gain is a negligible 0.03%.

3) Crowdfunded LLCs: These typically are web platforms that have developed in the last few years and allow perhaps a more agile ability to take advantage of the real estate market for the smaller but accredited investor. In 2013 launched its site to provide buyers and capital raisers to invest in LLCs via a website platform. There are several of these “crowdfunding” platforms available including also Fundrise, RealityShares and CrowdStreet.

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