How will rising rates affect REITs?

The rising interest rate environment is likely to lead to short-term underperformance for real estate investment trusts (REITs), according to Principal Global Investors.

In an interview with Money Management, Janine Yoong, portfolio manager at Principal, said the market disliked the volatility caused by rapid monetary policy changes.

Rates had been rising around the world, up to 1% in the US and UK and 0.35% in Australia. It was expected rates in Australia could reach as much as 1.5% by the end of the year.

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As to how this impacted commercial properties, Yoong said: “When rates go up, REITs do tend to initially underperform. What’s happened this year is the changes have been so rapid, the market doesn’t like the volatility and [REITs] have responded negatively. So they are lagging the general market year to date.

“But if you look over a longer period of time, in a period of rising interest rates, real estate actually does well because it’s an inflation hedge so as interest rates go up, so do rents and they have CPI-type structures in their leases and that helps the cashflow grow.”

However, relative to other global property markets, the Australian REIT market was still attractive for its quality assets.

“We tend to be a higher-yielding REIT market which are more sensitive to interest rates but based on investability, Australia is a very transparent and liquid market and the governance is good. We have a very deep commercial real estate market and the REITs tend to own better quality assets so it’s one of the more investable REIT markets around the world.”


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