After five years of booming returns, the higher interest rates could spell trouble for REITs next year, continuing what has been a roller coaster ride for the sector throughout 2015.
The Fed's "will they or won’t they" interest rate chatter led to year-long uncertainty in the sector, causing serious fluctuations on the MSCI REIT Index.
After surging to 1,230 in January, the index dropped 20%, then shot up again in October once the Fed decided not to raise rates. It then dropped (and later spiked again!) in November before settling at 1,085 in December, CNBC reports.
Rate hikes mean other investments will start to bring higher yields, so REITs stop looking quite so attractive. The Index averaged a 12% yield over the past five years, but is down to only 4%.
But, though higher rates are bad for REITs in the long run, the Fed can't ruin the coming year for REITs completely—supply is low in real estate, and demand is through the roof.
The biggest worry for REITs is a recession—something Sam Zell says could come in the next 12 months—which would pull the rug out from under the stock market, crashing REITs in the process. [CNBC]
