Rising Rates and REITs Return by Arthur Hurley, CFA, ColumbiaManagement
- While REITs typically demonstrate some interest rate sensitivity and sometimes have a “knee-jerk” reaction down when rates first move up, performance has often rebounded.
- An improving economy has the potential to dampen the effects of duration risk and interest rate sensitivity, given the increased earnings and dividend growth REITs can produce.
- The balance of income and organic growth attributable to REITs can offer an attractive investment opportunity, regardless of the interest rate environment.
Do Real Estate Investment Trusts (REITs) always underperform when interest rates rise? Many investors believe they do. However, analysis of historical REIT performance provides strong evidence to the contrary. Like many other income-oriented investments, the income characteristics of REITs may influence returns. However, we believe interest rates are not the only determining factor to REIT performance. There is more to the story.
Going back to 1980, there have been 21 periods when the 10-Year Treasury yield increased 50 basis points or more. During these periods the FTSE NAREIT All Equity REIT Index provided an average total return of over 5%, which notably outperformed the Barclays U.S. Aggregate Bond and Barclays Treasury Indices, and slightly lagged the S&P 500 Index (Exhibit 1). The REIT index outperformed equities 57% of the time, bonds 62% of the time and Treasuries 67% of the time. Additionally, when considering performance one year after rates increased, the REIT index provided average positive total returns greater than 16%, outperforming the three other indices. Essentially, the analysis gives evidence that REITs typically demonstrate some interest rate sensitivity and sometimes have a “knee-jerk” reaction down when rates first move up, but performance has often rebounded after the initial leg down.
Exhibit 1: Historical performance during periods of rising interest rates