REITs and High-Yield Investments- How They Are Affected as Interest Rates Rise
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REITs and High-Yield Investments- How They Are Affected as Interest Rates Rise
As a long-time investor in REITs, mREITs and other high-yield instruments, I am keenly aware that rising interest rates are a threat to my returns. Real estate investment trusts (REITs) compete with bonds, as they are required to disseminate a large portion of their revenues as dividends, and as rates rise their values often fall. REITs may still be a great place to put your money as an investor, but risks remain relevant as the FED increases the interest rate.
According to Nareit, rising interest rates may not be so detrimental to REITs. In normal economic periods, interest rates are raised by the FED when the economy is strengthening. REITs have had time to prepare, and their leverage which was so detrimental during the recession of 2008 has decreased. Debt coverage and interest expenses which cause REITs to lag have also improved, and there is a general awareness that rate increases are on the way. In addition, REITs have performed well when inflation has increased in relation to major indices.
The point of concern for myself and other REIT investors is that this may not be a “normal” economic time period. Rising interest rates typically follow economic expansion, and the FED lowers rates during economic instability. Interest rates have been near-zero for over a decade, and REITs will need to adjust to increasing rates. REITs depend on borrowing money, and that money will cost more to borrow as the rates increase. REITs are often seen as being “bond-like”, and have to compete with treasuries, particularly 10-year treasuries, which are also what drives mortgage rates.
Despite the risk, I am holding my REITs. I am diversified in the sector, holding long-term care REITs, mREITs, shopping mall REITs and other such REITs. Our economic condition is uncertain, and the history of performance during such times makes REITs worth holding in my portfolio.
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