REITs tend to underperform during periods of rapidly rising interest rates. Why is that? In this clip from "Real Talk" on Motley Fool Live, recorded on March 25, Motley Fool contributor Matt Frankel discusses some of the ways inflation affects data center REITs.
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Matt Frankel: As far as rising interest rates, it affects them in a couple of ways. No. 1, it increases cost of capital. That's the most obvious. Pretty much every real estate stock relies on borrowed money to some extent, so the cost of borrowing goes up as interest rates rise. No. 2, on any really high dividend stock, REITs or income stocks, investors expect a risk premium over what you can get from a risk-free investment, like a treasury bond. That tends to push yields higher as rates rise, and as yields and stock prices have an inverse relationship, it tends to put pressure on the stock prices. All other things being equal, REITs tend to underperform during periods of rapidly rising interest rates. That's not to say the underlying businesses aren't doing well. Over the cycles, it tends to balance out.