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Rate hikes and REITs

REITs pay high dividends and tend to be less volatile than equities, but how will they fare as interest rates rise Matthias Meyer, head of liquid real assets for Asia and Europe at Deutsche Asset Management, explains.


Meyer’s team focuses on real estate securities including REITs and developer stocks. A REIT or Real Estate Investment Trust, is a company that owns or finances income-producing real estate.

“We are still overall constructive [on REITs], with more focus on the short lease duration sectors in the US. We like sectors that are more resilient in the rising interest rate environment,” he told FSA.

Various REIT sectors such as hotels, self-storage or healthcare all act differently in the rising interest rate environment due to duration of the leasing, he said. Hotels have daily lease duration, while storage property might have monthly lease, and longer for healthcare properties.

In the US market, the preference is for companies with debt lower than peer companies and strong balance sheets, he said.

As an example, he said some shopping malls in the US have half the debt of their peers. “If a company has half the debt, it will be hit far less if there are any changes in refinancing costs.”

Rate hikes

REITs sit between equities and bonds in terms of interest rate sensitivity. Meyer believes REITs are likely to take a short-term blow from rising interest rates.

“Normally, if there are changes in interest rates, real estate securities tend to correct more than the broader equity markets, but less than fixed income.”

Over the long-term, inflation supports growth in rental income. REITs also fetch a global average of 3.5%-4% annual dividend and as an asset class are less volatile than real estate equities, he noted.

“The long-term driver [for real estate securities] is the underlying value of the real estate, which depends mainly on GDP growth, rental growth and inflation.”

Goldman Sachs Asset Management shared a similar view. REITs are more defensive than other bond proxies, such as stocks in the utility or consumer staples sectors, which offer high dividends with low volatility, the firm said.

Europe caution

Meyer explained that the investment team under Deutsche AM’s alternative group builds up the portfolio by bottom-up selection.

“We analyse each building the company owns and aggregate upward. Macro factors, such as GDP and inflation growth, are part of the valuation process.”

Meyer is cautious on Europe, where political risk is a key reason for low valuations of real estate securities. But he still finds some opportunities in the UK, which accounts for a small part for the portfolio.

“Some of the real estate companies in the UK are still trading a few standard deviations cheaper than the fair net asset value (NAV). After Brexit, Some companies are still trading at the [2008] financial crisis level of NAV, although we expect a global growth instead of a crisis.”

Part of the Mark Allen Group.