With the current low interest rate environment projected to continue into 2022, US REITs may outperform investment grade bonds as well, which should further improve their potential in terms of portfolio diversification. It should be noted that US REITs do not necessarily sell-off when interest rates rise as the correlation to the US 10-year Treasury yield going back to 1988 is 0.10.
REITs that are more sensitive to growth tend to favor modestly rising rates, reflecting prospects of a robust economy, while income-dependent REITs may thrive in lower-rate environments. Also, in a lower-interest regime, the divided streams from REITs have higher value.
The incorporation of US REITs in a total portfolio provides investors with core exposure to a wide range of commercial and industrial real estate properties. This hybrid asset’s potential diversification benefits, income yields and growth prospects may shine brighter as capital markets exit the lows reached in March 2020 and the economy continues to recover from the global pandemic.
Institutional investors use US REITs to gain exposure to the broad commercial and industrial property marketplace. Most US REITs own and operate income-producing real estate properties and structures and are characterized as hybrid assets on account of their equity and bond like features.
The basic legal structure of US REITs could provide stable current income to investors as they are required to distribute at least 90% of their taxable net income to shareholders. In addition, US REITs participate in long-term growth internally through occupancy and rent increases, tenant upgrades and redevelopment of existing properties and externally through accretive acquisitions, ground-up development and joint-ventures or fund management investments.
They are considered as highly liquid and transparent investment vehicles and are actively managed by experienced and professional management teams. REITs are diverse with exposures spanning across multiple sub-sectors, ranging from traditional office, industrial, healthcare and residential sectors to retail, hotels and specialized segments such as self-storage, data centers, and cell phone towers.
The author would like to acknowledge the contributions made by Katherine Winson to the article.