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Why REITs Witnessed Free Fall in 2015

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REIT stocks free fall

Most REIT stocks have experienced a free fall in 2015 after stupendous growth during the past five years. Ventas (VTR) has fallen 15.8% YTD (year-to-date), followed by Prologis (PLD) at 15.2%, and General Growth Properties (GGP) at 13.3%. Simon Property Group (SGP) could withstand the onslaught and has fallen by only 4.1%.

The fall in REIT stocks in 2015 came as investors avoided REITs due to concerns of higher interest rates. The Fed has already indicated an upcoming hike in interest rates. Though the timing is still uncertain, the rates are going to be raised in the next couple of quarters. REITs are pricing in the rate hike in advance.

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When the yield curve steepens, spreads between Treasury yields and REITs dividend yields fall. This makes REITs less attractive compared to Treasuries. As discussed in our series titled “REITs: Everything Investors Need to Know,” REITs have a lot of characteristics of a bond due to their high dividends and are therefore very sensitive to changes in Treasury yields. Higher interest rates also mean higher borrowing costs for REITs, which in turn impacts their profitability.

However, not all REITs have experienced a free fall. Companies with strong fundamentals that are ready for expansion during the good times have risen during this period. For example, General Growth Properties (GGP) is has risen 17.2%, while Public Storage (PSA) has risen 8.3% YTD. Public Storage (PSA) forms 4.2% of the iShares Cohen & Steers REIT ETF (ICF).

REIT indicators

In this series, we’ll discuss various indicators you can track to get a sense of where the REIT industry’s performance is headed. A sustained rise or fall in the indicators discussed in this series can reveal a pattern or give us direction about the industry’s movement.

We’ll cover all the important REIT indicators that positively or negatively affect the REIT industry as well as REITs such as Simon Property Group (SPG), Equity Residential (EQR), Ventas (VTR), and Public Storage (PSA). We’ll then discuss construction material costs and labor in the construction industry. In the end, we’ll delve into valuation and the outlook of REITs.

We’ll discuss the impact of vacancy rates on REITs in the next part of the series.

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