Tags: reits | federal reserve | rate | real-estate investment trusts

WSJ: REITs Stage 'Relief Rally' After Fed Rate Reprieve

WSJ: REITs Stage 'Relief Rally' After Fed Rate Reprieve
(Dollar Photo Club)

By    |   Thursday, 24 September 2015 07:15 AM

Although the Federal Reserve’s decision to keep rates near zero has frustrated many economists and investors, real-estate investment trusts (REITs) are apparently content with the central bank’s strategy.

The share prices of REITs have outpaced the broader market since the Federal Reserve decided last week to keep rates at historic lows for a while longer, The Wall Street Journal reported. The MSCI US REIT index also has climbed.

The recent gains mark a reversal from earlier this year, when the index was trailing the broader market.

The Fed has kept its benchmark rate close to zero for almost seven years. In that time, U.S. stocks have nearly tripled from their financial crisis low. The Fed meets again next month and in December. In its rate decision, the Fed cited low inflation, weakness in the global economy and unsettled financial markets.

“Despite the rate reprieve, commercial-real-estate firms still face an array of challenges. The economic outlook, while improving, remains cloudy," the Journal warns. "Sagging share prices make it harder to raise money and grow. And uncertainty over when interest rates ultimately will rise — and what the impact might be on their tenants and their investors — persists,” the Journal reported.

The immediate reaction to the Fed’s decision was “a relief rally,” said Ian Weissman, head of REIT research at Credit Suisse Group AG. But because the Fed isn’t raising rates at the moment “doesn’t mean we’re going to see this influx of cash from generalist investors.”

However, underlying conditions for many REITs are good, said Paul Morgan, a managing director and analyst at Canaccord Genuity. Rents are rising, while construction activity is moderate, which limits new supply of buildings, he said.

REITs themselves usually pay higher dividends than regular stocks, as they can avoid income taxes if they pay out most of their earnings to their investors. These higher payout ratios have boosted their popularity with investors since interest rates went to zero in 2008, explains Brett Owens of Forbes.

“My favorite REITs operate in the booming healthcare market. There’s a bull market in elderly Americans unfolding, and it will run for at least two or three decades,” Owens advises. He recommends Health Care REIT (HCN), Ventas (VTR) and Healthcare Realty Trust (HR).

Meanwhile, Sheridan Schechner, an investment banker at Barclays who advises REITs, said that REIT executives are looking for other ways to create value in the meantime, including pursuing joint ventures and trying to streamline operations. Schechner said he suspected their attitude about higher interest rates amounted to “Let’s get this over with.”

To be sure, other experts voice similar frustration with the central bank's rate strategy.

Some investors, expecting the Fed would be confident enough to nudge rates up by at least a quarter of a point, interpreted the status-quo stance as a sign that the global economy is dangerously weak.

Tom Hutchinson, the senior financial editor for The High Income Factor Newsletter, says the Fed made a “huge mistake” by holding rates at near zero.

“The markets had already factored it in. Now the markets are disappointed they didn't raise rates and are more worried about the global economy. They weren't talking about raising rates to 1 or 2 percent. What they were talking about raising it a fraction of a millimeter above zero where it's been for the whole recovery,” he told Newsmax TV's "Newsmax Now."

“This was an easy one. If they miss this one, what are they going to do when rate hikes need to be made and they're really unpopular?" he asked.

"A lot of people talk about waiting until December or next year as if that will be the promised land for rate hiking when everybody will love the idea. Of course, people are going to object then just like they did in September. They're only going to be able to raise rates over a chorus of naysayers. Until they get used to that fact, forget it. They'll never raise them.”

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Although the Federal Reserve's decision to keep rates near zero has frustrated many economists and investors, real-estate investment trusts (REITs) are apparently content with the central bank's strategy.
reits, federal reserve, rate, real-estate investment trusts
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2015-15-24
Thursday, 24 September 2015 07:15 AM
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