NEW YORK (Reuters) - Fears of rising interest rates slammed real estate again on Wednesday after the release of Federal Reserve minutes, making the sector the worst-performing among U.S. equities on the day and the year, but potentially marking a good time to buy.
Fear of rising rates and their impact on real estate investment trusts (REITs) is often misplaced, especially when the economy is growing and not in contraction, an analyst said, reflecting a widely held view in the industry.
“Historically what you’ve seen is that in rising interest rate environments, if you do see the accompanying accelerating growth, that’s actually a point in time where REITs are going to outperform the broader equity index,” said Laurel Durkay, a portfolio manager at asset manager Cohen & Steers Inc (CNS.N).
Minutes of the Fed’s policy meeting in January further cemented expectations that the central bank will raise rates next month and potentially increase its forecast of three hikes this year.
Investors have shuddered at the prospect, leading REITs .SPLRCR to fall 1.8 percent on Wednesday and 9.6 percent this year, the biggest decline of any sector in the S&P 500 index.
When growth and real estate fundamentals are strong, such as now, market corrections driven by rising U.S. Treasury yields have been a good time to buy REITs, according to Cohen & Steers, which oversees $62.1 billion in assets.
The firm found 11 times since the early 1990s in which REITs generated a total return of 16.1 percent on average following a period in which they traded at a discount relative to their property holdings, or their net asset value (NAV).
REITs have traded at a 2.7 percent average premium to their NAV since 1994, Cohen & Steers said. After REITs have traded at a premium for at least six months but then trade at a discount, a year later data show they have outperformed.
“You’ve seen time and time again REITs outperform in that scenario,” Durkay told reporters during a presentation on the relationship between rising rates and REIT underperformance.
“Only at a point in time when you see rising interest rates and decelerating growth do REITs underperform,” she said. “That’s a key component.”
Reporting by Herbert Lash; Editing by Cynthia Osterman