Please ensure Javascript is enabled for purposes of website accessibility

Will REITs Drop When Interest Rates Rise?

By Matthew Frankel, CFP® – Sep 24, 2021 at 7:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Higher interest rates can be a negative for REITs, but there's more to the story.

Rising interest rates can certainly be a negative catalyst for high-dividend investments like real estate investment trusts, but that doesn't mean their stock prices will always go down when rates go up. In this Fool Live video clip, recorded on Sept. 3, Millionacres senior real estate analyst Matt Frankel, CFP, discusses the general relationship between REITs and interest rates and why investors shouldn't stress about it too much.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

Matt Frankel: "How did REITs perform during the last period in which interest rates went up?" REITs, all things being equal, are very sensitive to interest rates. Most dividend stocks are. When I say interest rates, I'm generally referring to not consumer interest rates but the treasury, like the 10-year Treasury yield is a really good benchmark to know.

Generally, when that rate goes up, you will see REITs go down. The reason is income investors tend to expect a risk premium over what they can get from a risk-free investment like a treasury bond, so if a 10-year Treasury is yielding 2%, a REIT might be yielding 5%, if the 10-year Treasury yield jumps up a percentage to 3%, investors are going to expect a similar percentage jump from their REIT dividend yield. Since dividend yield and stock price have an inverse relationship, rising rates lead to rising dividend yields, which generally lead to lower stock prices. Now, that's all things being equal. All things are not always equal. For example, in the COVID pandemic, interest rates plunged, in a normal environment, that would've been a good thing for REITs, but real estate was one of the hardest-hit sectors when the pandemic started. There are a lot of different factors at play and it's not just interest rates. In a normal, boring stock market, interest rates rising are negative for REITs, interest rates declining are positive for REITs.

To answer Ryan's question more specifically, in the latest period when interest rates went up, which was, I want to say about 2018 to 2019 was really when rates started to rise, REITs underperformed significantly, real estate was one of the worst-performing sectors in the market during that period. It still went up, but tech stocks definitely outperformed it, it underperformed the S&P 500 a little bit. 

One thing to keep in mind if you're a REIT investor, it tends to even out over time, they do worse when rates are rising, better when rates are falling, and over time because these are long-term investments, it tends to even out.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
360%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.