Despite the European Central Bank’s (ECB) first interest rate in eleven years by 50 basis points today, this rate hike will not have a negative impact on Real Estate Investment Trusts (REITs), according to Hazelview Investments. “REITs are typically hit hard when central banks begin talks of raising interest rates. This is due to investors views on how the higher interest rates will impact a REIT’s cost of capital”, Claudia Reich Floyd, portfolio manager and Head of the German office of the Toronto based international asset manager, explains. “So, a lot of investors’ concern in this regard is already priced into the share price of listed REITs.”
Therefore, the popular perception of REITs not performing well in a rising-rate environment can be countered, says Reich Floyd. “It is important to note that a tightening monetary policy is typically coupled with strong economic and job growth – fundamentals that lead to demand outstripping supply and driving rental growth in real estate.”
While, according to Hazelview’s own research, REITs might actually perform poorly at the beginning of a rising-rate cycle, this turns quickly, as the market anticipates and immediately prices in the risks of higher policy rates. “In periods where rate hike talks turn to rate hike actions, REITs have historically performed very well”, Reich Floyd says and points to North America: “In the US, for example, where interest rates have already been risen this year, the last four rate-hiking cycles since 1994 resulted in a 12 per cent average return for REITs on an absolute basis, outperforming the equity markets by almost 300 basis points.”
Hazelview Investments is an active investor, owner and manager of global real estate assets dedicated to creating value for people and places. Hazelview employs a global investment and asset management team of more than 80 people in its offices in Toronto, New York, Hong Kong and Hamburg and manages CAD 11.6 billion (approximately EUR 8.5 billion) in real estate assets (as of 30 April 2022).
