Interest rates and REITs

On Behalf of | Oct 26, 2016 | residential real estate

Real estate investment trusts have enjoyed a good run of high yields over the past year. The possibility that interest rates might be hiked may slow the yields produced by REITs, leading investors in Florida and around the country to be more hesitant about purchasing shares in 2017.

According to the National Association of Real Estate Investment Trusts, the FTSE/NAREIT All REIT index had total returns of 12.6 percent through Sept. 30. By comparison, the S&P 500 had a total return of 7.8 percent during the same time period. These high returns have been quite attractive to investors. However, as it is likely that the federal government will increase interest rates, there are signs that investors are becoming more hesitant.

Experts state that while REITs are affected by how much interest rates rise, the underlying economy is more important to their success than interest rates over the long term. When interest rates rise, it can be an indication that the underlying economy is strengthening, which bodes well for REITs. As unemployment rates continue to fall, equity REITs could see a boost since they invest heavily in commercial office spaces. One type of REIT that has not performed as well are those that hold interests in apartment buildings. The availability of more apartments means that rents may soften.

Real estate investment trusts primarily invest in commercial real estate such as office buildings, shopping centers, warehouses and hotels. However, there are some REITs that are set up to invest exclusively in residential real estate mortgage pools. People who are looking at such a REIT as a potential investment may want to have the assistance of an attorney in examining its portfolio.