Volatility has notably increased for real estate investment trust (REIT) investors as a result of the growing likelihood of the coming Fed tightening and the associated jump in treasury yields.
Driving this trend is the expectation of growth resumption for the U.S. economy following the weak showing in the first quarter. Recent economic data points, ranging from factory sector ISM survey, housing surveys and monthly automobile sales, have all been encouraging.
The improving labor market has been the icing on the economic cake, with the May non-farm payroll report not only showing better-than-expected job numbers, but also gains in average hourly earnings. Adding to the delight were the latest retail sales numbers that surged in May and the consumer credit numbers that showed growth in U.S. consumer debt in April.
We will know more after this week’s FOMC meeting, but the consensus expectation is that these improving economic indicators have increased the odds of a rate hike in September, notwithstanding the IMF’s request to delay the first rate hike for some time next year.
REITs Take a Hit
Though the REIT industry emerged as a winner last year among widespread volatility, and even outperformed the broader equity market in January, the FTSE NAREIT All REIT Index’s total return dipped 0.1% in May against the S&P 500’s (SPY) gain of 1.3%.
This followed a decline of 4.7% in April compared with the S&P 500’s return of 1.0%. While volatility seems to have eaten away much of the broader equity market gains in the second quarter, the impact on the REIT stocks has been more pronounced.
Rising Rates and Economic Strength
A rise in interest rates will undoubtedly lead to a high borrowing cost for the REITs on which they are highly dependent. Moreover, high-dividend yielding stocks like REITs usually become less attractive when treasury yields rise.
But that does not take away opportunities from this sector. This is because the REITs business is tied to the basic necessities of life such as food, housing and health care without which we cannot live for long. They offer real estate on rent for dwelling proposes, warehousing, shopping, dining, vacationing and advertising too.
