NEW YORK (Reuters) - A growing economy and rising employment should help real estate investment trusts (REITs) stave off the cold they typically catch when U.S. interest rates head higher, Cohen & Steers (CNS.N), a pioneer in REIT investing, said Thursday.
REITs peaked last summer when more investors began to accept the notion the U.S. economic recovery was strong enough to sustain a rate hike, and yields on benchmark U.S. Treasuries bottomed.
Investors believed valuations could not improve in a rising interest rate environment, said Jon Cheigh, at global portfolio manager at Cohen & Steers, the largest active manager of REITs.
“The story that REITs are about rates is misleading,” he said on Thursday at a press conference. “Interest rates are the dominant story for how these stocks behave rather than the prospects for the economy.”
Rising rates indicate a more sustainable economy that should boost demand for office space as employment expands, a fact REIT investors have often ignored for 25 years, he acknowledged.
But the knee-jerk reaction to rates may be changing. REITs have gained wider acceptance, and scrutiny, since they became an S&P 500 sector in August.
“The moral of the story is a lot of times you have these reflexes in the market. Ultimately the market has digested that as it started to say, ‘Wait a second, what are the real drivers of these businesses, what’s really important?'” Cheigh said.
The National Association of Real Estate Investment Trusts (NAREIT) said on Thursday that improving balance sheets and an emphasis on equity over debt have left REITs well positioned for a rising rate environment.
REITs are up almost 5 percent since the day after Donald Trump won the U.S. presidential election in November, but are still off 10.7 percent since peaking at a more than 20-year high in late July, according to MSCI’s U.S. REIT Index .RMZ.
Yields on the benchmark 10-year U.S. Treasury note US10YT=RR have gained almost 14 percent, rising to 2.36 percent from 2.07 percent since the election.
REITs did not outperform the overall market during the past five years because of ultra-low rates, another misconception, Cheigh said. The total return for the S&P 500 index .SPXT rose 99.2 percent over the five years ended 2016. The gross return for REITs .dMDRM00000GUS during that period was 75.6 percent.
Reporting by Herbert Lash; Editing by David Gregorio