Ready Or Not, Another Rate Hike Is Coming
By: Brad Thomas
All signals suggest that The Federal Reserve will increase rates this week, traders suggest there’s a 90% probability.
Since the last hike in December (from 0.25% to 0.5%), the labor market has strengthened and economic activity has been improving. Last week the Labor Department said that the U.S. employers added 235,000 jobs in February and the unemployment rate dipped to 4.7% from 4.8%.
The biggest challenge for Real Estate Investment Trust (REIT) investors with respect to interest rates is that while bond yields change quickly, changes in real estate fundamentals take time to work through the system. As Tom Bohjalian, Executive Vice President and Head of U.S. Real Estate with Cohen & Steers explains,
“We believe that as long as the rise in long-term rates is commensurate with improvement in growth, REITs can perform well. In fact, REITs have historically delivered strong returns in periods of rising yields, as these periods are generally characterized by accelerating economic growth.”
Looking at the past 20 years, there have been seven periods in which 10-year Treasury rates experienced a sustained rise of 50+ basis points over a period of one year or more. REITs had positive returns in six of those periods, and they outperformed the S&P 500 in five.
Bohjalian points out that “ too often, we see investors focusing on short-term changes in interest rates, yet losing sight of the bigger picture . As investors look to construct portfolios suited for the current environment, we believe REITs offer attractive attributes.”
Yield with growth potential: The 158 companies in the FTSE NAREIT Equity REIT Index have an average dividend yield of 4.1%. In the S&P 500, real estate is currently the third-highest-yielding sector at 3.5% (28 companies represented), compared with the S&P average of 2.1%. REITs have historically provided steady dividend growth along with capital-appreciation potential.
Inflation protection: REITs have historically been positively correlated to unexpected changes in inflation, compared to the negative inflation associations with broad stocks and bonds.