Tuesday, May 26, 2015

Interest rates have very little effect on REITs in the long term

You heard it right. Fellow blogger Got Money Got Honey wrote an excellent piece here and I simply love this quote some much it warrants the title of this post.

GMGH pretty much summed up the REIT Symposium very well in the blog post and I'll like to reiterate the point in the subject title.

Interest rates have very little effect on REITs in the long term.
And why is that so? Because these are equities, REITs are not bonds, and do not behave like bonds in the long term

Equities share price largely tracks the business performance in the long run; this is true for all equities. If the underlying business is junk, you'll get junk returns.

REITs are businesses that can grow, improve their profits year-on-year. They're not merely Fixed Deposits/Bonds that pays out coupon, with no capital upside/downside.

In fact, rising interest rates very little NEGATIVE effects on equities. Look at this article by Fool.sg. They did an amazing job at showing that stocks rose during 12 out of the 14 times US Fed increased interest rates.

The world, after all, has fifty shades of grey, eh?

Yellen says
Last week, Yellen had said that "the Fed may tighten more quickly if the economy performs better than expected or raise rates at a slower pace if it disappoints".

Interest rates are raised when the economy is performing well. This means that in the overall scheme of things, businesses improve, the economy up and running. REITs can revise, eventually, achieve higher positive rental revisions.

Investors, who are calm, will realise that higher interest rates is a good thing. It means that the economy is doing well. Any short-term market correction could be a good time for investors to accumulate good businesses.

But of course, we must first identify if we are traders or income investors. Your strategy and decisions will then be vastly different.

2 comments:

  1. Fool article is for normal shares - not meant for REIT.
    REIT will suffer with interest rate rise - it is just like you and I as homeowners paying larger mortgage payment monthly when interest rates rise (some already feeling the painful effects).

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    Replies
    1. Hi there. Good point about the Fool Article.

      The difference between REITs and homeowners are that homeowners do not own properties for income. Whether the economy is doing well or not does not affect us, all we need is just a roof.

      REIT, however, can have upward revision of rental to counter their higher interest expenses. I've written another article on this matter. :)

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