REIT ETFs May Hold Their Own in Rising Rate Environment

“Residential investment is on pace to grow at a solid 9 per cent rate this year. We are trimming our expectations for 2016 slightly — lowering our forecast for residential investment to 8 per cent from 11 per cent previously — but we still expect housing to be the top performer among the major components of GDP,” according to Goldman Sachs analysts.

For residential REITs exposure, ETF investors can take a look at the iShares Residential Real Estate Capped ETF (NYSEArca: REZ), which includes a 47.1% tilt toward residential REITs and a 3.33% 12-month yield. REZ gained 4.4% year-to-date.

Other analysts have also dismissed claims that there is a bubble in the real estate space where prices have been rising, contending that the higher prices reflect the dearth in supply.

Moreover, while inflation may be low now, REITs are seen as a hedge against potentially rising inflation ahead. REITs with shorter lease durations will fare better in a rising-rate environment since they are able to more frequently negotiate higher rents from tenants.

“Real estate is TIPS (Treasury Inflation Protected Securities) on steroids,” Bob Steers of real estate investment firm Cohen & Steers told the Financial Times. “REITs are not bonds. The most certain thing is that if rates are rising and you are in fixed income you will lose money.”

For more information on real estate investment trusts, visit our REITs category.

Max Chen contributed to this article.