Shares of real-estate investment trusts typically get hammered as interest rates rise—not this time.
So far, many REITs have bucked the trend with investors expecting a looser regulatory environment and fiscal stimulus under the administration of President Donald Trump.
Since interest rates started increasing after Election Day, shares of REITs have risen by 5.8%.
Real estate has been a beneficiary of easy monetary policy for the past five years, and some believe the commercial real-estate market has already peaked, with property values in certain locations looking frothy.
The market was heading into the later innings of the real-estate cycle, but the new administration has extended the rally, said Jon Cheigh, portfolio manager at Cohen & Steers. The real-estate sector is benefiting from economic growth, job growth and prospects for higher corporate profits, he said.
“It’s easy for people to get the idea that following quantitative easing and low interest rates, that’s going to end bad. The facts do not align with that view,” he said.
Lodging and office REITs have benefited in particular, as investors expect a more accommodative business environment to boost business travel and spur job creation in the financial and legal sectors. That would spark demand for office space in New York and Washington, in particular, benefiting REITs such as SL Green Realty Corp. and Vornado Realty Trust.
Net-lease REITs, which own free-standing buildings occupied by single tenants such as pharmacies or discount stores, typically are hurt most by rising interest rates. But they have rebounded after a short-lived dip when the 10-year Treasury yield jumped to 2.60% in December. It now hovers around 2.45%.
‘Our approach has been to buy on the election and take profits by the inauguration as some stocks are nearly fully valued.’
—Marc Halle, head of global real estate securities at PGIM Real Estate
With net-lease REITs, the landlords own the buildings while tenants manage them and pay all the operating expenses. Similar to bonds, these REITs generate a steady yield and their shares tend to rise in a low-interest-rate environment. But they tend to suffer when rates rise as investors look elsewhere for higher yields.
Shares of Realty Income Inc., the largest net-lease REIT by market capitalization, have risen 3% since Election Day.
Publicly traded REITs have reduced their debt levels from a postfinancial -crisis peak of almost 58% of total book-assets ratio in the first quarter of 2009 to 49% as of Sept. 30, according to the National Association of Real Estate Investment Trusts. These landlords also have been able to refinance and extend their debt maturities.
“These measures leave the industry well positioned for the interest-rate environment ahead,” said Calvin Schnure, senior economist at NAREIT.
To be sure, some camps think the run-up in share prices in expectation of government tax and spending programs aimed at boosting growth is overdone. Nevertheless, shares of REITs have been lagging behind the broader market, with the Dow Jones Industrial Average up 8.4% since Election Day. These-dividend-paying stocks also underperformed financial stocks since their debut as a stand-alone classification from the S&P 500’s financial stock group in September.
“Our approach has been to buy on the election and take profits by the inauguration as some stocks are nearly fully valued,” said Marc Halle, head of global real estate securities at PGIM Real Estate, an arm of Prudential Financial Inc. Mr. Halle said he needs more concrete data on policy and interest rates before he makes further investment moves.
The anticipated fiscal stimulus could be phased over a longer period and the boost to companies might not kick in until 2018, analysts said.
Investors should also have the stomach for volatility as the dramatic nature of some of the proposed new policies in health care, tax and trade could upend industries and fuel uncertainties, analysts said.
A more aggressive policy regarding border controls could entail tougher visa policies and affect travel to the U.S., and the proposed changes in tax and trade policies threaten the health of the retail industry, said analysts at BTIG Equity Research.
“We think overall it’s going to be a choppy year for REITs,” said James Sullivan, managing director at BTIG Research.