Nevertheless, many analysts argue that REIT shares will continue to perform, despite rate risks, since interest rates alone don’t dictate REIT performance and other factors may override rate concerns. For example, a strong economy and greater mergers-and-acquisitions activity could outweigh rate fears.
While Citigroup economists project 10-year Treasury yields will rise to 2.95 by the end of 2015, they argue that REITs could produce a total return of between 5% and 15% for the year. Michael Bilerman, Citi’s head of real estate research, argues that a stronger economy will overshadow rising rate concerns.
“If rates are rising because the economy is doing well…it means rents are rising, and landlords have more pricing power,” Bilerman said in the article.
Notably, apartments and residential REITs stood out in the space. The iShares Residential Real Estate Capped ETF (NYSEArca: REZ)has increased 37.7% year-to-date as Americans opted to rent instead of purchase a new home this year. [Meet This Year’s Best Financial Services ETF]
However, market observers warn that if interest rates suddenly spike instead of a gradual rise, REITs could experience a quick sell-of similar to what happened in May 2013 after the Fed suggested it would cut its bond-purchasing program, which caused rates to surge.
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.