Those of us in the retail investing community will know of AK71, who is a legend for accumulating dividend paying stocks at cheap prices during the GFC, and receiving mind-blowing dividends from these astute buys.
It turns out he has a YouTube video channel, where he shares his thoughts as well. The following video does a good job of explaining the impact of higher interest rates on REITs, amongst other things he shared.
Quick notes:
- REIT behave similar to, but not exactly like bonds. When interest rates go up, REIT prices come under pressure.
- REITs are bags of assets. When interest rates go up, the asset prices come under pressure. This is because the risk-free rate is now higher, other risk assets re-price. There is no reason to invest in risk assets unless you are paid higher than the risk-free rate.
- adding to the trouble is the cost of funding, which is usually loans, becomes more expensive as interest rate goes up.
- REITs with strong balance sheets will survive, even if distribution amounts drop
On the last point, it is clear now that with interest rates rising, low quality companies and investments (REITs among them), are going to suffer, and quality becomes important once again. Balance sheet strength, quality management, strong cashflows and other strong fundamentals may determine the winners and losers for our portfolio.
As usual, this is not investment advice and do your own diligence.
Addendum 11 Oct:
Adding in a response from AK, in response to my question to him:
Question:
Thanks for the video. How are REITs affected by interest rates going up too fast, compared to a gradual rise in rates? Do you mean to say that a gradual rise allow assets to be re-priced slowly, and give REITs time to adjust their portfolios by getting rid of weaker assets and adjusting their borrowings?
Reply:
Also the fact that their tenants are less likely to suffer stress which means lower default rates if interest rates increase slowly. REITs also need time to have contracts renewed with higher asking rents to cope with higher cost of debt. When interest rates increase rapidly and significantly, there is less reaction time available. The resulting stress breaks things.
The information provided on this finance blog is for educational and informational purposes only and should not be construed as financial or investment advice. You should always do your own research and due diligence before making any investment decisions. Any reliance you place on the information provided is strictly at your own risk. I will not be liable for any losses or damages that may arise from your use of the information provided on this blog. Remember, investing involves risks and there is no guarantee that any investment will achieve its objectives or that any investment strategy will be successful. Always consult with a licensed financial professional before making any investment decisions.
Comments
Post a Comment