The Federal Reserve has decided to raise interest rates for the third time since the 2009 financial crisis. While higher interest rates would usually depress prices of stocks with high dividend yields, such as REITs and utilities, their share prices held steady or went up after the decision for the interest rate hike was announced last week. The last two rate hikes negatively affected the markets, but this time, investors were relieved that the Federal Reserve did not indicate a more hawkish outlook.
However, rising interest rates will still affect REITs, due to their business model. REITs are often heavily reliant on debt to fund their properties, and rising rates would increase the cost of borrowing. In addition, investors usually include REITs in their portfolios as a proxy to bonds, and bonds tend to perform poorly in periods of rising interest rates.
Increased cost of borrowing
REITs are primarily funded by debt to...