Why Did REITs Rise as the Fed Increased the Rates?



REITs rose as the Fed lifted the rates

An REIT is a company that owns or finances income producing real estate. Mortgage loans and refinancing makes the news related to interest rates very much a part of the REIT environment. On December 16, the iShares US Real Estate ETF (IYR) and the iShares Mortgage Real Estate (REM) closed with positive numbers of 1.9% and 3.4 %, respectively. The SPDR S&P 500 ETF (SPY) rose by 1.4%. Much of the performance was driven by the Fed’s decision to increase the policy rates.

The above graph shows the relationship between ten-year Treasury rates and REITs.

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Impact on REITs

It’s always beneficial for investors to know how economic factors impact individual securities. This allows investors to determine a portfolio’s position. The securities that stood out were Chimera Investment (CIM), NorthStar Realty Finance (NRF), Resource Capital (RSO), and New Residential Investment (NRZ). They had intraday returns of 6.3%, 4.2%, 12.4%, and 8.7%, respectively. IYR’s outperforming sectors were retail and healthcare REITs. They ended the session with returns of 2% each. Simon Property Group (SPG), Equity Residential (EQR), and Welltower (HCN) ended the session with returns of 1.9%, 1.9%, and 2.5%, respectively. Although it’s early to say what impact each subgroup will have after the hike in the interest rate, a few things can be estimated.

  • Residential REITs derive their revenue from rentals and apartment sales. Rising rates could increase the borrowing cost for investors. It could cause the asset’s value to fall.
  • Healthcare REITs use rented facilities. A hike in the interest rate will increase the borrowing cost. This will lead to difficulty when entering into long-term rent agreements.
  • Retail REITs could be impacted. A rise in the interest rates could dent consumer spending. This would hurt the sector’s total revenue.

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