REITs Well-Prepared for Rising Interest Rates, Inflation

REITs have typically performed well in periods of rising interest rates and inflation—a fact investors appear to be overlooking in the current market environment, according to participants in a Bloomberg Intelligence webinar April 10.

John Worth, Nareit executive vice president for research and investor outreach, pointed out that REITs have posted positive total returns in 87 percent of previous periods of rising interest rates. In more than half of those times, REITs have outperformed the S&P 500 Index.

Andrew Rubin, institutional portfolio manager at Fidelity Investments, agreed with Worth, but noted that there has been a growing view for several years now that investors should sell REITs in times of rising rates: “It’s almost created a self-fulfilling prophesy.”

Given their moves to shore up balance sheets and reduce leverage, “REITs should be as insensitive to rising rates today as maybe they’ve ever been,” Rubin said. Worth agreed: “REITs appear to be very well-prepared for a higher interest rate environment.”

Thomas Bohjalian, executive vice president at Cohen & Steers, noted that typically REITs and their growth rates accelerate moving into a tightening rate cycle. Today, however, more questions abound as to how fast REITs will grow. “That’s a key consideration versus some of the other cycles we’ve been in.”

Another consideration is that short-term interest rates are starting from a level of zero, Bohjalian explained. “Asset values will be more sensitive to smaller changes in rates because the base rate we’re operating off of is lower than we’ve experienced in the past,” he said.

Turning to inflation, Worth stressed that the outlook is for modestly higher inflation going forward. He noted that real estate is generally considered to be a good inflationary hedge.

Rubin noted that REIT dividend growth has outpaced inflation in 18 of the past 20 years. “That’s an endorsement for the inflation-hedging qualities of REITs,” he said. He also pointed out that REITs appear “cheap” on a number of levels: “REITs are flashing green from a valuation standpoint,” he said. Bohjalian agreed: “We think REITs are cheap on an absolute and relative basis.”

As for property sectors that are well-positioned in the current environment, Bohjalian pointed to shorter-lease property types such as lodging, multifamily and industrial. Rubin noted that the multifamily sector “stands out broadly” due to its ability to respond to the current environment by raising rates. “Amidst the group of apartment-oriented REITs, there are some stand-out opportunities that could be rewarding going forward,” he said.

For his part, Worth added that due to the “unwarranted discount” at which REITs are trading, “there are nice valuations across a spectrum of property sectors.”

(To listen to a replay of the webinar, please register here.)