Can REITs Predict Interest Rate Moves

With all the recent chatter about the Federal Reserve tapering its bond buying program, coupled with the talk about interest-rate increases, I found that several of the large REIT ETFs have been under performing the market in recent times. Of course, REITs in general are all sensitive interest rate moves as higher rates translate to higher borrowing costs for the REIT, thereby affecting cash flow as the “cost of doing business” goes up. But can REIT performance actually predict when and how much interest rates will change? This may be a more difficult question to answer.


Historically, REITs have performed relatively well during times of interest increases. For instance, as the savings and loan recession was ending in the early 1990s, the Fed increased interest rates by more than 2.6% in a short period of time spanning about one year from late 1993 through 1994. REITs in general, kept pace with the relatively flat S&P 500 during that time but eventually lagged when interest rates hit a high of 8%. Nevertheless, rising interest rates did not impact REITs adversely for quite some time.


During another period of interest rate hikes between mid 2004 through mid 2006, although more gradual than the previous rate hike mentioned, saw REITs perform more than three times better than the S&P during the same period. While history is no predictor of future outcomes, it does offer some guidance as to the manner in which REITs behave during times of interest rate hikes. Just citing these two examples would suggest small incremental interest rate hikes to be the most favorable condition for REITs in general.


Let’s take a look at some of the larger REIT ETFs that have been showing a poor performance ever since the FED has been suggesting raising interest rates. These large REITs basically invest in many of the same public REITs but vary greatly in their yield and expense ratios. Some notable names in their portfolios include, Simon Property Group Inc. (SPG), Public Storage (PSA), HCP, Inc. (HCP), Ventas, Inc. (VTR), Avalonbay Communities Inc. (AVB), Vornado Realty Trust (VNO) and Prologis, Inc. (PLD) to name a few. As you can see these REIT ETFs invest in a variety of REIT businesses from storage facilities to residential structures and health care spaces.


A quick rundown of the largest REIT ETFs:


Vanguard REIT ETF (VNQ)
Current yield 2.97%
Expense Ratio of 0.10%
YTD return of 21.44%


iShares US Real Estate (IYR)
Current yield 3.46%
Expense Ratio of 0.45%
YTD return of 19.98%


iShares Cohen & Steers REIT (ICF)
Current yield 2.94%
Expense Ratio of 0.35%
YTD return of 22.89%


Current yield 2.95%
Expense Ratio of 0.25%
YTD return of 21.59%


Current yield 2.25%
Expense Ratio of 0.07%
YTD return of 21.64%


First Trust S&P REIT ETF (FRI)
Current yield 2.39%
Expense Ratio of 0.50%
YTD return of 20.75%


Investors clearly have many choices when it comes to the REIT space and REIT ETFs as well. As you can see the above listed ETFs all experienced amazing returns YTD and all offer decent yields while you wait. As income investors we look to ideally capture capital appreciation coupled with an income return in the form of dividend payments and these ETFs do not disappoint. Just be careful when selecting a specific ETF as expense ratios vary widely among them.


Is this the time to jump into REITs or their ETFs as the Feds’ language of suggested interest rate hikes have certainly led to recent weakness in all the above ETFs. Or perhaps more volatility and weaker prices lay ahead? One thing seems to be certain. Any near term shock the Fed may deliver to the REIT space will definitely be offset by increased economic growth as suggested in times past. So perhaps just sit on the side and watch the story unfold and jump in when overall weakness has hit this sector and slowly build a position that offers a decent yield and potential future growth.


Do you own any REITs or REIT ETFs in your portfolio? How do you feel about rising interest rates affecting these investment vehicles? Please let me know below.


Disclosure: Long NONE

31 thoughts on “Can REITs Predict Interest Rate Moves”

    • Hi DM,

      It seems like many of the REIT plays are on shaky ground these days despite having an amazing 2014 so far. I think many are worried too much about what the Fed will do regarding interest rates. Thanks for stopping by.

  1. Thanks DH,
    VNQ is my REIT ETF of choice, but it’s been too hot to handle. I have trouble with the idea that any “market” as a whole, can predict anything. Back tested academic studies have shown a minimal correlation for bond markets, but nothing for equities. Still, I expect bond proxies (REITs, Utilities, etc) to struggle if/when interest rates start to climb…..because investors have chased yield for several years and gone outside of their comfort zone.
    Income Surfer recently posted…Why My Paycheck Fails to Satisfy, and a Weekly UpdateMy Profile

    • Hi IS,

      VNQ seems to be the big player out there among the REIT ETFs. In general, what I have noticed is that many of the dividend and yield bloggers do not own these ETFs in their portfolios. Individual REITs exist, but no ETFs. I wonder why.

      While I agree with your premise that “bond proxies” may struggle with rising interest rates, I don’t suspect it will have much of an impact for a very, very long time, except for knee jerk reactions that will be overblown. Interest rates by any measure, even with an increase coming are still at all time historical lows and it will take a lot of rate juicing to really feel an impact on those “bond proxies.” Thank you for sharing your ideas.

  2. I think there will be some downward pressure as “safe” yields increase so investors find other places offering a reasonable yield. Additionally, REITs will be forced to look elsewhere for cheaper capital for expansion or refinancing existing debts. This will certainly impact their overall market value, but given I’m not as interested in the pure value of the holding, this isn’t a significant concern.
    writing2reality recently posted…Trades – August No-Cost Dividend Growth Portfolio PurchasesMy Profile

    • Hi w2r,

      There’s no question that rising interest rates may draw capital towards other investments in time as people will prefer “safe” yields, as you say, instead of riskier investments such as high yield dividend stocks, REIT and MLP plays. However, even with rises in interest rates, the historical yield will still be very minute compared to years and decades past which will still bode well for “less safe” higher yielding finnacial instruments. Thanks for sharing your opinion.

    • Hi DGJ,

      ARCP is not alone in dropping significantly in recent days. Anything REIT related, no matter the sector nor ETFs have been spared. All this fear is gripping the industry as a whole as everyone wonders what will happen to interest rates going forward. Everyone expects a raise, but the question is how much. I don’t think any raise will impact these businesses much as rates are extremely low based on historical standards and have a lot of room to climb before any real impact can be had on this sector. Thank you for commenting.

    • Hi Tawcan,

      I have seen some of the Canadian REITs in several of the Canadian blogger portfolios. They seem to be quite popular. OHI like every other REIT or REIT ETF has seen substantial declines in recent weeks because of the feared Fed interest rate hike. I think the fears are way overblown as we have a long way to go before interest rates reach any significant level that can impact businesses. Thanks for sharing your REIT holding and commenting.

  3. Hi Divhut

    Several weeks ago I was taking profits on some of REIT positions, now I am looking to add back that exposure. I still think they could fall a little further though. Looking at adding to O, OHI, HCP, SUI

    • Hi MSF,

      Anyone who took profits in REITs in recent weeks is surely happy. All the talk about interest rate hikes have definitely spooked the sector. I feel the downside trend has been greatly exaggerated as even moderate interest rate increases are still historically very low. Thanks for sharing your opinion and potential REIT holdings.

  4. “In general, what I have noticed is that many of the dividend and yield bloggers do not own these ETFs in their portfolios. Individual REITs exist, but no ETFs. I wonder why.” Easy, look at the yields for the ETFs you quoted. The highest is less than 3.5%. The REITs that I own (ARCP, HCN, and O) yield between 4.98% and 7.91%. I don’t think that the added diversity any of the ETFs may offer over holding these 3 REITs compensates for the loss in income.

    • Hi KeithX,

      You make some valid points regarding the yields of the ETFs when compared to yields of individual REITs. However, the reason for owning any ETF is to add some stability through diversity. Of course, this is a personal preference that some investors choose to invest in. Granted, earning a yield of over 7% is nice but as we all know the higher the yield the more risky the investment. Thank you for sharing your opinion.

  5. DivHut,

    I think most of the major damage to REITs took place last year. The quick move up from 1.4% to 3% on the 10 year bond took out most of the weaker hands. Many people unfortunately chasing yield, chose a 3 or 4 percent REIT and thought they had the safety of bonds when in all reality most REITs should yield at least 3 percent higher than the 10 year bond. HCP is a high quality company so you may not get 6%, but I will definitely add more shares below $40. I also think the same fate may await some of the lower yielding utilities.

    My Dividend Pipeline recently posted…Weekly Sharebuilder PurchasesMy Profile

    • Hi MDP,

      I happen to agree with a lot of your assessments in the REIT space as it relates to interest rates and how many are simply chasing the highest yields without concern for the quality of their investment. Still, it’s interesting to see how things will pan out in the coming months and years as rates inevitably rise. I have a feeling that there will be an exaggerated reaction and many REITs and their ETFs will decline sharply. But, over time, calmer heads will prevail and most REITs will adjust to higher rates as they have in the past and continue to grow their businesses. Thank you for stopping by and commenting.

  6. DivHut,

    As you know I own a lot of REIT’s in my portfolio. I am not concerned about a wild swing or drop in price as much because I reinvest my dividends and love to get more shares at a discount to what it is worth. I would be more concerned on payout ratio vs AFFO/FFO. Have to monitor and watch to see what happens, but if I am looking to time the market on individual names why not trade options which I have been trying a little too.

    From a dividend centered approach I am happy to be in and receiving these dividends indefinetly while we see how it plays out. I would lean more towards the Triple Net lease structure though because I think it offers more protection. Realty Income and ARCP management in my opinion should be smart enough to steer their company’s in the right direction.
    Dividend SWAN recently posted…August 2014 Dividend UpdateMy Profile

    • Hi DSWAN,

      The way you describe your REITs is the way I describe the stocks in my portfolio. I also do not care for wild price swings as I believe in all my holdings and simply average down if prices swing lower. As long as the payout ratio is sustainable or AFFO/FFO for REITs I’m happy to collect those dividends.

      O and ARCP are two REITs that I see in many dividend income portfolios and I can see the key reason why, yield. For my money, I’d like to invest in healthcare REITs for the next ten to twenty years as demographics shift in this country. I’m looking at HCP, VTR and OHI though others are on my radar as well. I appreciate your input on this subject. Thanks for stopping by.

  7. DivHut,

    I’ve read academic studies on this, and there doesn’t appear to be a major long-term correlation between rising interest rates and subsequent lackluster REIT returns. But investor emotions can certainly overrule any academic study out there, especially in the short term.

    I’ve been looking at adding to my OHI holding specifically right now. I think it’s attractive after a 5% drop the other day, although I don’t plan for it to be a major holding. The reliance on Medicare is a bit worrisome. But I love the yield and growth potential. The quarterly dividend raises of late have been particularly nice.

    Best wishes!
    Dividend Mantra recently posted…Using Extreme Frugality In The Beginning To Get Things RollingMy Profile

    • Hi DM,

      I have seen many of the same studies you speak of which is why I continue to look at REITs as a potential addition to my portfolio as any short term drop will be mitigated over the longer term, especially with a growing REIT such as many in the healthcare space. Besides, we are entering a phase of interest rate increases from historically low starting points. There shouldn’t be much of an impact for several years. The three REITs on my watch list these days are HCP, VTR and OHI. Each had some nice drops in recent weeks and prices/valuation are starting to look compelling. I’d like HCP under $40 ideally but VTR and OHI look decent at current levels. Thank you for stopping by and commenting.

    • Hi AnhaInvesting,

      While it’s true no one can predict with any accuracy what will happen in the future one thing is certain, humans will always overreact and exaggerate initially to certain pieces of news and eventually cooler heads will prevail and things go back to business as usual. Like you, I expect the REITs to initially take a hit but over time they’ll adjust to the new economic climate and continue their growth. Thanks for commenting.

  8. I’ve mentioned this before, but I like the Healthcare REIT space, maybe a bit too much, and I think I’m a little heavy there with holdings in HCP, HCN, UHT, and OHI. They are spread across my 401k, IRA, and brokerage account, but still. So far all are positive and the dividends have been coming in. I’m still keeping my eye on them a little more closely than something like JNJ and TD

    • Hi DH,

      You sound very much like me in terms of liking the health care REITs. Unlike many of the dividend bloggers I do not own any REITs or MLPs. Not that I’m against those investment vehicles, I just focus on building a more conservative dividend growth portfolio instead. However, of all the REITs that exist I am fond of the health care REIT space and in particular HCP, VTR, OHI and to a lesser extent NHI and LTC. If prices become more attractive I’d like to add to my overall health sector holdings such as JNJ, BCR, BDX, ABT and ABBV. Thank you for stopping by and sharing your thoughts.

  9. I am a little leery of rate increases and the relationship with REITs. I haven’t been adding (except through DRIP) to my REITs over the last 6 months. I will am actively trying to make them a smaller portion of my portfolio (both in terms of overal size and dividend contribution).

    I was pleased to see O exchange out some 6.75% debt with 4.5% a few days ago. I feel that a well managed REIT will do just fine!

    Take care!
    ILG recently posted…Recent Purchases: Sept 9th to 18thMy Profile

    • Hi ILG,

      As you can see from my portfolio I am not invested in many of the dividend blogging community favorites, REITs and MLPs. I am not against these types of investments I just wanted to build a more conservative dividend income portfolio. That being said, I have started looking at several of the health care REITs such as HCP, VTR and OHI to name a few with NHI and LTC also on my mind. It’s hard to deny the trend of a growing gray population in the U.S. and some of the larger health care REITs seem to be poised to capitalize on this multi-decade phenomenon. REITs have existed in times of rising interest rates before and adjusted to the environment just fine. I feel that some exposure to the sector is important for any portfolio. Thank you for stopping by.

  10. With the good news on the job growth, come the panic sell triple digit on the DOW anticipation of rate increase, I finally bought a REIT – O . We will see how it is going to go in June when the Fed “lose” patience ehhehehe.

    It was a good topic at the time, and it’s a very good topic for today and months to come. Nice post.
    Vivianne recently posted…Nine Reason$ I Love About My JobMy Profile

    • Hi Vivianne,

      There’s no question that chatter about rate increases will impact the prices of REITs in the short term. Of course, REITs have existed in higher interest rate environments and have done well and quality REITs should continue to do the same after the eventual Fed rate hike that’s coming. As you mentioned these are the same types of conversations that we have had in the past and is very relevant today. Thank you for stopping by and commenting.


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