Source: Motley Fool
REITs have been getting a lot of bad flak recently. I like to think that this is down to 2 reasons.
Firstly, because REITs are yield instruments traded on the public capital markets, the market tends to value them together with fixed income products. Accordingly, when interest rates goes up, the price of REITs tends to drop in tandem with other fixed income products, as investors now expect a higher yield from their investments.
Secondly, because REITs are essentially a leveraged property investment (you buy property, gear up to 30-40% permanently, and collect the yield), a rising interest rate environment will increase the cost of funding for REITs. Much like how your mortgage payments go up when interest rates go up, the same thing happens with REITs, affecting the amount of distribution received. Indeed, the weighted average cost of debt I’m seeing for most REITs these days is