Real estate investment trusts weakened since the summer months on prospects of a rising interest rate environment, but sector-related exchange traded funds are clawing back after Donald Trump won the elections.
The Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF, has gained 2.3% over the past month. VNQ even attracted $678.1 million in net inflows over the past week, according to XTF data.
REITs typically perform poorly in a rising rate environment since many investors see the asset as a proxy for bonds when fixed-income returns weaken, reports Rodrigo Campos for Reuters.
Consequently, when rates and yields rise, REITs are sold off on expectations of higher costs for financing real estate acquisitions, and their dividends become less attractive against less risky Treasuries.
However, since the November 8 election, REITs ETFs have strengthened 4.8%, despite the Federal Reserve’s second interest rate hike in almost a decade and promises to raise rates three more times in 2017.
“REITs are a derivative of credit and the economy so as long as one of those is doing well, REITs will do well,” said Alex Goldfarb, the senior REIT analyst at Sandler O’Neill Partners, told Reuters. “If there’s a view that rents will improve, as long as the move in interest rates is not too significant REITs will still perform.”
Equities have strengthened since Trump’s victory on bets that the incomign administration will lower taxes, cut regulations and spend billions on fiscal stimulus to support the economy. Consequently, more traders are looking at REITs as a play on an improving economy, even if the pro-economic policies are inflationary in nature, which would incite further rate hikes.
“To say REITs are going to do poorly in a rising rate environment is true simplistically, but if the economy is improving that’s going to be cash flow generating for REITs in the right place,” Art Hogan, chief market strategist at Wunderlich Securities, told Reuters.
For more information on real estate investment trusts, visit our REITs category.