The Federal Reserve is prepared to move short-term interest rates another two or three times this year, and experts anticipate REITs will remain a safe investment during this time.
REITs have been managing their balance sheets since the recession, the National Association of Real Estate Investment Trusts reports, creating resilient and diversified portfolios to withstand heavy hits from central bankers should a tightening in monetary policy occur.
In December, the Fed made a widely anticipated move and raised short-term rates a quarter of a point to a range of 0.50 to 0.75. This was the second upward adjustment made in a decade — central bankers raised rates by 0.25% back in December 2015.
One important thing of note, NAREIT economist Calvin Schnure told Bisnow, is that interest rates are still extremely low compared to historic levels. “Interest rates are going from extremely low to very low,” Schnure said. “They’re not even approaching moderately low yet.”
Though most investors are wary of higher borrowing costs, REIT performance continues to strengthen, with lower debt ratios, strong equity issuance and high interest coverage ratios, according to NAREIT.
Equity REITs in particular have been deleveraging their portfolios by taking advantage of funding through capital markets — more than $280B in equity capital has been issued since 2010, according to NAREIT. That’s 60% of all industry capital raised during that period.
“REITs have funded an increasingly large amount of their portfolio with equity investment and made very modest use of debt,” Schnure said. “[Interest rate increases] will have some minor incremental impact on financing costs, but the main takeaway is that REITs have very little use of debt.”
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