This year, musings about Fed interest rate increases are making markets wary, yet one of the strongest sectors is real estate investment trusts, which traditionally doesn’t outperform when rates are rising or expected to rise.
in addition, REITs are expected to to get an extra boost this year in recognition of the Sept. 19 separation of real estate from the Standard & Poor’s financial category and the creation of its own S&P sector. Still, that might be the least of the positive fundamentals driving this asset class. Year to date, REITs overall are up about 11.56%, while the S&P 500 is up about 7%.
(Related on ThinkAdvisor: Real Estate to Become Its Own S&P 500 Sector)
“In the last several years of declining and low interest rates and active and receptive bond and equity markets, REITs have taken advantage of that and have refinanced their balance sheets so they’re almost bulletproof,” says Ashi Mathur, BMO head of investment and corporate banking for North American real estate.
“They’ve de-risked their business by creating longer term ladders so there’s no bulging maturity in any one year; they’ve got much flatter schedules, so each year only 10% of debt might be coming due, and that’s a huge advantage.”
In addition, REITs are “run by entrepreneurs who have been in the industry a long time and have been able to capitalize on opportunities … The capital markets have been supportive and investors continue to have a thirst and hunger for yields. Not many sectors can boast the yields that REITs have provided over a consistent period of time. It’s an attractive sector,” he adds.
Edward Mui, a Morningstar equity analyst, agrees. “It’s a combination of the underlying performance of the properties still being relatively healthy and the characteristics of the investments, where REITs provide yields that a lot of investors can’t find elsewhere for reasonable prices,” he says.
Mui notes that the Fed’s action – or lack thereof – in raising interest rates has lengthened the outlook. “Clearly it’s possible the Fed may increase interest rates sometime this year, but the long trajectory of those rate increases still is on the lower side of where people were at the beginning of year.”