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What would a rise in interest rates mean for REITs?

| Nov 7, 2016 | Risk Management

Experienced stock investors in Southern California know that real estate investment trusts (REITs) are generally a sound investment and have been doing well. Those who wisely chose to invest in REITs have likely seen favorable returns this year and over the past decade.

However, exercising some caution may also be wise in the coming months as market analysts predict next year may not be quite as lucrative.

Why are REITs popular?

REITs have made investing in real estate possible for people who want a piece of the market but don’t want to manage their own income properties.

They have historically produced high yields because of the relatively low tax burden placed on companies that own income real estate. Coupled with low interest rates, investors have been able to use REITs as a strong and reliable source of income.

With a possible rise in interest rates looming on the horizon, however, experts have expressed concern over the future of REITs.

Uncertainty in the face of increased interest rates

Many market analysts are predicting that the Federal Reserve will increase interest rates in 2017. For REITs, this could mean declining performance.

Historically, low interest rates correlate with higher returns in the stock market, making stocks more appealing than bonds. If interest rates do increase, it could drive up the price-earnings ratio of REITs, scaring away some investors.

While a sharp interest rate increase could mean trouble for REITs, they could remain stable through a more gradual rise. Because increased interest rates are typically the sign of a strong economy, investors may still be attracted to the benefits of REITs, even if they are not quite as profitable in the future.

What is next?

The next step for investors is to wait and see whether the Federal Reserve decides to raise interest rates.

For businesses that could be negatively affected by an interest hike, the waiting period is an opportunity for preparation. If you are concerned that your company could be impacted, it may be wise to consider seeking legal guidance before a change is announced.