The debate on the potential impact of rising interest rates on REIT stocks continues. Since a Real Estate Investment Trust (REIT) must pay out at least 90% of its taxable income as a dividend to investors, REIT stocks are relatively high-yielding investments. Investors are debating the sensitivity to interest-rate changes in an attempt to predict whether REIT stock prices will fall if interest rates increase as expected.
Conventional wisdom suggests that higher rates are generally bad for REITs, since less-risky income from alternative income-generating assets such as Treasury Securities would become more attractive as Treasury yields approach REIT yields. Analysts that study the relationship between Treasury rates note that over the past 15 years data indicates a strong inverse relationship between REIT stock prices and interest rates. These analysts strongly believe that interest-rate increases are likely to result in REIT stock price declines, such that an appropriate “risk” margin is maintained between the less-risky Treasury yield and the more-risky REIT dividend yield.
The opposite camp says that increases in interest rates will be reflective of a strong economy that will allow REITs to raise rents and increase dividend payouts at a pace to maintain the margin between the less-risky Treasury yield and the more-risky REIT dividend yield. However, many economists do not see a near-term growth rate that is robust enough to allow REITs to increase dividends at the pace required to maintain current stock prices in a rising rate environment.