Published: September 18, 2015
With all of the constant speculation that the Federal Reserve will be shortly raising interest rates, many an investor is wondering what the future holds for the U.S. economy. This question was answered in one aspect when a large Real estate investment trusts Index known as the MSCI US REIT Index, which holds shares of 143 different companies, was on its way to having its worst year since 2008.
For those who may not know, a REIT is a type of security that invests in real estate through property or mortgages, and can be traded on major exchanges much like a stock. Therefore, one easy way to understand what they are is by comparing them to a stock index or mutual fund, but instead of trading stock, it trades ownership in real estate ventures and commercial properties such as apartment complexes, hospitals, office buildings and hotels (just to name a few). They are great at helping provide investors with easy ways to diversify their portfolios along with being extremely liquid, providing special tax consideration and typically offering high dividend yields.
Even though it seems that the Feds plan is to raise interest rates slowly and gradually, keeping the rates still historically low for some time, the way investors decided to take that news provided an outcome that was anything but gradual. The market, as many know, is more or less controlled by the emotional state of its investors. What did this mean for the MSCI US REIT Index when investors found out that interest rates could rise even a little bit? Well naturally it took a nose-dive and is now at a negative return of 9.4 percent for the first time since 2008. Now, to be fair, one cannot put all of the blame on interest rates. One could certainly argue that after a six year rally, and a growth of about 346 percent, that it is entirely possible that the Index and the overall market for real estate was a tad overvalued and due for a bit of a drop. The index even grew 30 percent last year alone. Furthermore, all of the hullabaloo happening in China certainly did not help either.
Junior business leadership student and PRISM member Jordan Den Herder seemed to agree with the mainstream speculation when he stated, “I am not surprised that people would react so drastically and in such a preemptive manner. Also the Index had been on a growth streak for so many years and was bound to correct itself eventually.” Another PRISM member, Jason Martinez, had this to include: “I have a bit more of a tolerance for such volatility because I try and maintain a long term mindset when it comes to investing in things like indexes. If anything I would hold onto my investment in my REITs index and try and buy even more shares when it hits its trough and has become undervalued.”
Moreover, as interest rates do start to rise, the payments people receive from investing in REITs indexes start to look less and less attractive relative to bonds, along with the fact that as interest rates rise it becomes more expensive for REITs to raise money to fuel their growth. This drove the prices down for REITs sharply in combination with anxiety investors shared about China.
But in the interest of making lemonade out of lemons, one could say that soon would be a great time to invest in certain REITs indexes since they are having their first off-year in 6 years. In any event, it would be wise to wait and see what the Fed actually plans on doing because in theory, the indexes could rally quite a bit if the Fed decides to hold off on raising of interest rates.