Impact Of Interest Rates On Real Estate

Real Estate Investment Trusts is an investment vehicle held by corporations that help in directly investing in the Real Estate Industry. They are either publicly listed on the stock exchange or privately held. They let investors to purchase trusts that hold real estate assets that generate revenue.

For corporations investing in REITs is a technique of avoiding 90% of income taxes of a company whilst distributing all the evaded taxes as dividends to stockholders. REITs were systematically composed to aid investments in Real Estate.

REITs do pay the investor significantly well. They function similarly to stocks that have a relatively small market capitalization. Although, they usually pay more in the form of dividends and not it the form of increasing face value. It should be noted that more than half of REITs return comes from dividends. Being a high revenue investment, REITs tend to show a high responsiveness to any changes in Interest rates. Here is a discussion on their connection.

High Yields On REITs:

The amount of yield depends on the sub-division of the REIT. While the median REIT yield rates may be between 4 to 7% different sectors may generate different amounts of profits. While REITs in the residential and healthcare sectors are inclined towards more risk, they also generate more revenue. Hotel trusts are the ones with the most variable yield rates. Although REITs generate a high amount of profit, there is a certain amount of risk involved that the investor should take into account before investing.

REIT Yields In Contrast To Interest Rates:

While decreasing trends in interest rates can be deemed as good for stock prices and vice versa. While firms find it difficult to cope in times of higher interest rates as there are little prospects of growth. Hence, REITs too are liable to decline in yield during periods of high interest rates. While the concept of different types of REITs namely Mortgage, Equity, Realty and Real Estate Mutual Funds all having slightly different effects but the overall result remains somewhat the same. Interest rates and yields do have an inverse relationship as trends of the past few decades have shown.

REIT Prices With Contrast To Interest Rates:

Looking closely at REIT prices and interest rates in the US economy one can conclude the following. In the early 70s REIT price index depicted an excessively downward slump. From the inception of the mid 70s to the late 80s REIT prices picked up gradually but from the early 90s REIT prices were consistent with the medium-term interest rate.

Analysts Predistion:

Analysts predict that investing in Real Estate Investment Trusts would be a high risk after 2004 as the price gains exceed the yields. These gains too are expected not to last much longer with the recent bearings in interest rates. Furthermore, traditionally medium term interest rates are low and if figures match those of previous years. REIT prices are likely to plunge further down.

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May 1, 2011 • Tags: Estate, Real Estate • Posted in: Financial News

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