The current state of interest rates and mortgage rates has made purchasing property a daunting prospect for many individuals and businesses. As a result, real estate investors have turned to Real Estate Investment Trusts (REITs) as a safe haven during this period of higher rates. However, the question remains: is investing in REITs still a viable option?
Rich Hill, the Head of Real Estate Strategy & Research at Cohen and Steers, recently discussed the pros and cons of investing in REITs during this turbulent market with Yahoo Finance. Hill acknowledges that rising interest rates have had an impact on the commercial real estate market, which is inherently a leveraged asset class. As interest rates increase, financing costs also rise, causing concerns for the sector as a whole.
Hill highlights the forthcoming wave of loan maturities in the commercial real estate market over the next few years. Many of these loans were financed with floating-rate debt in previous years, adding to the challenges faced by the sector. However, Hill argues that listed REITs are in a much better position compared to the broader commercial real estate sector.
He provides several reasons to support this claim. Firstly, listed REITs have a loan-to-value ratio of less than 35%, indicating a conservative approach to leverage. Lessons learned from the 2008 financial crisis have led REITs to substantially deleverage their balance sheets. Additionally, approximately 86% of their debt is fixed for around six years, reducing the risk of refinancing compared to the broader commercial real estate market.
Hill acknowledges that rising interest rates and the need to refinance debt will present a modest headwind for listed REITs, resulting in a 1.4 percentage point hit to earnings per annum. However, he emphasizes that this is not a significant obstacle and believes that REITs are well-positioned to weather the current downturn in valuations.
When asked about international opportunities, Hill explains that while his firm runs a globally diversified portfolio across listed REITs, their current focus is on the United States. The US market serves as a leading indicator, with listed REITs experiencing a stabilization in valuations while private valuations continue to decline. However, Hill anticipates that similar opportunities will arise in Europe in the near future.
In conclusion, while the current landscape of rising interest rates poses challenges for the commercial real estate market, investing in listed REITs is seen as a more favorable option. Their conservative leverage approach, fixed debt terms, and stronger financial footing compared to the broader sector make them attractive investments despite the modest headwind from rising interest rates.
