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Are Real Estate Investment Trusts Too Hot?

02/12/2015

Real Estate Investment Trusts, also referred to as REITs, may be too hot according to Steven Wechsler, CEO of the National Association of Real Estate Investment Trusts and reported by Yahoo Finance. For one thing, REIT’s have been given a huge boost thanks to the reduction in interest rates earlier this month. However, after an already strong year in 2014, many analysts are asking how high the stocks will actually go.

REIT Movement

Last year, a 28 percent total return was produced by all equity REITs, as well as a 3.56 percent yield on dividend by year end. In comparison, Standard & Poor’s rating, which is referred to as the S&P 500, only had a total return of 13.69 percent and a yield on dividend of 2 percent.

There is no question that REIT’s have been providing investors competitive performance for a long time, this coupled with portfolio diversification and strong dividend income. Investors who want yield in a low-interest rate environment are being drawn to REIT stocks, especially global investors in countries like Japan where the country is in the midst of a recession. Year-to-date, REITs are up roughly 7 percent.

In 2014, residential REITs were ranked as being the top performers. However, at the top was apartment REITs that for total returns, delivered just below 40 percent in spite of increasing and high-demand rents. Even though healthcare total return was second, no sector fell short.

According to David Toti, analyst of REITs with Cantor Fitzgerald, when looking at the fundamentals of real estate to include multifamily, office, retail, and industrial, they are all accelerating. Today, investors are eager for yield, which makes things right for REITs.

The only real concern is extraordinarily high valuations. As an example, if the Federal Reserve Bank decides to hike interest rates, REITs will no longer be as attractive as they were before, even though their fundamentals are completely solid.

Possible REIT Risk

While talking about REITs hitting historical highs from 2007, Toti added that a repeat of May 2013 is possible, a time when the bond market imploded. Interest rates are being closely monitored because in reality, the risk is greater than any upside. However, because fundamentals for REITs are so incredibly strong, many experts believe they have the ability to survive a hike in interest rates.

There is no question that what happens will depend heavily on what interest rates do but with the price of property rising, it still works. Even if interest goes up, there is still support from increasing incomes so while some offset is possible, a crash is not predicted.

Even so, many investors are being more discriminating about particular REIT sectors because income is better for some than it is for others. For instance, gains specific to apartments will be moderate due to greater supply coming to a number of major markets. However, gains are expected to be greater for office space. For the time being, REITs are not too hot but what ultimately happens if interest rates go up could change things to some degree.

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