Are Low Interest Rates Good for REITs?

Posted Jan 12, 2022

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While low interest rates are typically thought to be an advantage for buying real estate, more than one factor plays a role in the success of any investment, including REITs, or Real Estate Investment Trusts.

REITs that manage assets (known as equity REITs) buy real estate, lease the space to tenants (often through a master tenant) and collect rent. The rent is income that is distributed to the shareholders. In order to maintain its tax-advantaged status as a REIT, the company must distribute at least 90% of its taxable income to shareholders annually. Mortgage-focused REITs buy mortgages or mortgage-backed securities, and as a result, their income stems from the interest payments. Those companies may have a different view of the interest rate environment.


Sponsor Expertise and Management Are Essential

Whether a REIT is focused on property or financial assets, at least 75% of the company’s gross income must come from real estate (rent or sales) or real estate finance (like mortgage products). While rising interest rates may affect real estate prices, there is no clear association between increasing interest rates and poor returns from REIT products.1 Low rates may indeed increase the attractiveness of REITs, which may be better able to find bargains in financing purchases, construction, and refinancing. REIT dividends may potentially be attractive to investors seeking returns in a low interest rate environment as well. 

If the investor is considering private REITs, the fees the REIT charges can make a more significant impact on the return to the investor than the effect of interest rates. If the REIT has a high fee structure, that may reduce the dividends available to the shareholders more than rising interest rates. 


What Does History Tell Us About Low Interest Rates and Equity REITs?

Looking at REIT performance and interest rates historically, there have been six sustained periods since the early 1970s during which the 10-year Treasury yield increased notably (signifying inflation).2 The data on REIT performance from the previously cited S&P research indicate that the investment vehicle type had a positive average return in four of the six indicated periods and performed better than the market overall in three of the six.


Interest Rates Have Competing Impacts

While rising interest rates can raise the cost of borrowing and may reduce the value of property that is in a REIT or sought for inclusion in one, higher interest rates are typically associated with economic growth and higher inflation, which can be a positive influence on real estate investments. In addition, when inflation is rising, landlords may be able to raise rents, and research shows that REIT dividends historically outperform inflation.

1 The Impact of Rising Interest Rates on REITs, S&P Dow Jones Indices LLC, July 2017

2 Federal Reserve Bank of St. Louis


This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Past performance is not a guarantee of future results.
A REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. There are risks associated with these types of investments and include but are not limited to the following: Typically no secondary market exists for the security listed above. Potential difficulty discerning between routine interest payments and principal repayment. Redemption price of a REIT may be worth more or less than the original price paid. Value of the shares in the trust will fluctuate with the portfolio of underlying real estate. There is no guarantee you will receive any income. Involves risks such as refinancing in the real estate industry, interest rates, availability of mortgage funds, operating expenses, cost of insurance, lease terminations, potential economic and regulatory changes. This is neither an offer to sell nor a solicitation or an offer to buy the securities described herein. The offering is made only by the Prospectus.

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