No. of Recommendations: 6
This newspaper article, from 1982, talks about the experience of holding REITs in high interest rate environments in the 70s and early 80s.
https://www.nytimes.com/1982/12/05/business/the-re...As you move towards higher interest rates - e.g. perhaps stagflation triggered by an oil crisis - the value of REITs is marked down as they collectively take one more step closer to wipeout.
You can imagine that 50% interest rates would eventually wipe out the equity of every REIT, whereas 0% rates, 'free money', would make even the worst REIT wildly profitable at an operational level.
So there is a curve of rational business valuation connecting those two extremes of heaven and hell, so to some degree, movement of the sector may follow prevailing rates as much as sentiment.
As the 1982 article notes, one of the interesting problems is that after taking a beating, the surviving REITs usually can't raise capital because they all trade at discounts.
By the time they trade near NAV again, and can raise capital without massive dilution of shareholders, prices of assets have long since moved up.
Perhaps this is why some big REITs engage in property development as much as property operations.
An interesting question to ask, in these days of oil crisis and potential looming inflation, is:
Which categories of REITs suffered the most in past stagflationary environments and past oil crises?
The answer is: those with too much debt, those that were not essential.
You might expect residential, logistics, supermarkets, healthcare facilities to continue to be in demand even during recession or stagflation.
Whereas, the most fancy high-end offices and expensive high street stores, might not be in as much demand.
REITs that offering small lots to small businesses, may suffer from a thousand cuts as those small businesses go to the wall.
REITs working with a few very large customers, might face a catastrophe if even one of them fails and occupancy drops 10 or 20% all at once.
REITs with short term contracts (that can be walked away from without penalty) suffer more than REITs with long term contracts.
Inflation-linked contracts may help, but are no guarantee - if the inflation-linked rent rises too fast, the tenant goes bust trying to pay it.
If there is a cap & collar on the inflation link to moderate it, a brief surge in inflation might not be captured in the rent until many years later when the property re-enters the market for letting.
Perhaps it is a good idea to pay a little extra for those companies that can thrive in both a high and low interest rate environments.
Industrial land might be valuable or not; location may matter or not.
In particular, in the USA you have mortgage REITs, which hold debt rather than bricks, and you might expect those to be ruined fastest of all, as we saw with MBS in the GFC 2007-2009.
Does anyone with knowledge of REIT investing/operations have further thoughts they can add here?
TRS
