Real Estate
REITs Poised to Benefit from Falling Interest Rates
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Aug 01, 2024
Slowing inflation and the end of the Fed tightening cycle are likely to be catalysts for real estate returns. Historically, real estate investment trusts (REITs) have exhibited positive relative performance following interest rate peaks. We see the potential for the out-of-favor asset class to post relatively positive returns as the interest rate environment normalizes.
Several years ago, our real estate securities team authored an article examining the relationship between REIT returns and interest rates. At the time we concluded there was little empirical evidence to suggest the historical correlations of these two measures have been consistently negative or positive over longer periods of time.
We recently revisited this work, conducting regression analyses of REIT returns and interest rate movements over various time periods. Our work suggests that more recently, the negative relationship between REIT returns and 10-Year U.S. Treasury yields has become stronger.
The graphic below plots listed real estate returns vs. the monthly change in the 10-year U.S. Treasury Yield, over various three-year periods. In the most recent three-year period, the slope of the line has steepened and the relationship between the two variables has strengthened, highlighting the negative relationship (that REIT returns have been more likely to rise as rates fall, and vice versa).
The implication, assuming this relationship holds up, is that less restrictive monetary policy and falling interest rates should be a supportive tailwind for REIT returns. Coupled with generally strong supply and demand dynamics across most property types, we think REITs are well positioned to close the performance gap with broader equity indexes.
For more information on our outlook for Global Real Estate Equities, read our latest Real Assets Quarterly.
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Index Definition
The MSCI U.S. REIT Index is a free-float-adjusted market-capitalization weighted index that is comprised of equity real estate investment trusts (REITs). With 153 constituents (large-, mid- and small-cap), it represents about 99% of the U.S. REIT universe.