It is generally accepted that Real Estate Investment Trusts (REITs) move inversely with interest rates. This is due to the notion that they are alternatives to fixed income securities because by definition REITs must pay out most of their earnings in dividends.
This has some folks worried because many believe the Federal Reserve will be raising interest rates relatively soon, inciting a flight of capital from REITs to bonds. Some disagree, however.
Critics would argue that interest rates are just one of many factors that play into REIT pricing, and in a healthy economy (which includes rising interest rates) these factors would wash out any negative effects of interest rates. Occupancy across all property types is at record highs, demand is strong and NOI across all property types is expanding. The total average return for real estate stocks in 2014 was 32.3 percent, the highest since 2006, compared to a relatively meek S&P return of 14.9 percent. Of course, we won’t know what the future holds until it’s behind us, but many factors point to continued growth in real estate and real estate securities.