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Quarter-End Insights

REITs for a Rising Rate Environment

In a rising interest rate environment, which is generally tough on REITs, we'd prefer exposure to reasonably priced, narrow-moat firms with attractive internal and external growth prospects, conservative capital structures, and well-laddered debt maturity schedules.

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  • U.S. REITs appear slightly overvalued as a group, with pockets of opportunity in the health-care and retail property sectors. Most Australian property stocks appear fully valued, but we see some value in the retail sector, while the office and residential sectors appear the most overpriced.
  • Capital is increasingly flowing across borders for property investments, and property values are high.
  • With acquisition prices high, more REITs are expanding their development pipelines, with initial yields projected to be 200 basis points or more above acquisition cap rates.
  • We generally expect REIT prices to move inversely with changes in long-term government bond yields, and we would expect REITs to generally underperform in a rising interest rate environment.

 

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Todd Lukasik does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.