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The Impact of Rising Interest Rates on REITS Are REITs destined to underperform when interest rates rise?
BY Michael Orzano

Over the past two decades, real estate investment trusts (REITs) have emerged as a popular and efficient way for investors of all stripes to access the real estate asset class. Strong long-term total returns, combined with other key investment characteristics such as liquidity, high dividend yields, and their potential to increase diversification and to hedge against inflation, have contributed to the appeal of REITs. Today, however, there is growing concern about how REITs will perform when interest rates ultimately rise from their current subdued levels.

It is commonly asserted that REITs are destined to underperform when interest rates rise. However, an examination of the historical record suggests that this is a misconception. Although interest rates certainly affect real estate values and, therefore, the performance of REITs, rising interest rates do not necessarily lead to poor returns.

Since the early 1970's, there have been six periods during which U.S. 10-Year Treasury Bond yields rose significantly. In four of those six periods, U.S. REITs earned positive total returns, and in half of those periods, U.S. REITs outperformed the S&P 500®. In one of the periods, U.S. REITs and the S&P 500 essentially posted identical performances, and in only two periods did the S&P 500 outperform U.S. REITs (see Exhibit 2).

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