Misconceptions About REITs and Interest Rates

Joe Fisher

In the latest episode of the NAREIT Podcast, Joe Fisher, director with Deutsche Asset & Wealth Management, discussed research on the performance of REITs in periods of rising interest rates.

Rising interest rates are generally seen as a drag on REITs’ performance and returns, according to Fisher, because they raise the cost of capital, and real estate is a capital-intensive business.

“When [REITs] do have a change in the cost of capital, it becomes more expensive potentially for them to go out and grow the business,” he said.

Deutsche published research earlier this year using historical data to show that while REITs are relatively rate sensitive, they tend to underperform equities by a small margin over time periods in which interest rates rise. However, in the time periods following an increase in interest rates, the REIT market actually tends to outperform the broader markets.

In part, the higher REIT returns are attributable to growth in cash flows, according to Fisher.

“As you see cash flows moving higher, you do see performance start to pick up,” he said.

In the current environment, Fisher said he anticipates that the Federal Reserve will continue on its path of lower interest rates. He also called the outlook for inflation “relatively benign.”

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