Hike, Stop, and Bounce: REIT Performance After Monetary Policy Tightening Ends (2024)

FAQs

Hike, Stop, and Bounce: REIT Performance After Monetary Policy Tightening Ends? ›

Historically, they have enjoyed a resurgence in total returns after monetary policy tightening cycles end. In fact, REIT total returns bounced back with impressive performance in the last quarter of 2023.

REITs posted total returns north of 5% for the month, although they remain in negative territory year-to-date. On the heels of a rough month of April, the FTSE Nareit All Equity REITs Index mounted a comeback in May with total returns up 5.29%.

With healthy property fundamentals and a favorable interest rate environment, REIT fund managers expect the sector to deliver double digit returns this year.

During periods of economic growth, REIT prices tend to rise along with interest rates. The reason is that a growing economy increases the value of REITs because the value of their underlying real estate assets increases.

REIT Market Outlook and Forecast

The REIT market is projected to see 2.6% year-over-year growth in 2023. The REIT market is forecast to grow at a CAGR of 2.8% from 2022 to 2027. The market size is estimated to increase by $333.01 billion from 2022 to 2027.

But with the Fed signaling a potential pause on rate hikes, the time for a recovery in REITs may finally be near. And if investors look beyond negative headlines on interest rates and empty office buildings, there are actually plenty of opportunities with strong fundamentals to be found.

More than a year of interest rate hikes by the Federal Reserve pushed down returns on real estate investment trusts, or REITs. While higher rates negatively impacted nearly every sector of the economy in 2022 and most of 2023, real estate was hit especially hard.

For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.

REITs Outperform Stocks During Recessions

The stock market is extremely volatile during recessions. Publicly traded stocks rely heavily on the performance of the companies that are being traded in order to succeed. During a recession, those companies struggle, and their stock value drops.

After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024. The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.

Is now a good time to invest in REITs? ›

There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower. Demand is healthy while supply is constrained, and REIT valuations relative to the broader equity market are meaningfully below the historical median.

Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.

FALLING REAL YIELDS MAY SPARK REIT RALLY

With real yields appearing to have peaked in late 2023, prospects of falling interest costs and lower discount rates may provide meaningful tailwinds for the capital intensive, long-duration REIT market.

Year-to-date, U.S. public equity REIT total returns have been underwhelming. As the 10-year Treasury yield has risen, REIT total returns have typically fallen. During 2024, the 52-week correlation between REIT and 10-year Treasury total returns was consistently negative.

By law, REITs must distribute at least 90% of their taxable income to shareholders. This means most dividends investors receive are taxed as ordinary income at their marginal tax rates rather than lower qualified dividend rates. Any profit is subject to capital gains tax when investors sell REIT shares.

Analysts are most optimistic on the Office REITs industry, expecting annual earnings growth of 50% over the next 5 years. However this is lower than its past earnings growth rate of 114% per year.

Low growth prospect: The prospect of capital appreciation is quite low in the case of REITs. It is mainly because they return as much as 90% of their earnings to the investors and reinvest just the remainder 10% into their venture.

REIT 12 Month Forecast

Based on 32 Wall Street analysts offering 12 month price targets to REIT holdings in the last 3 months. The average price target is $29.29 with a high forecast of $32.91 and a low forecast of $25.23. The average price target represents a 3.15% change from the last price of $28.39.