Abstract
Current economic development in global markets promises gradually rising interest rates, which seems to concern many investors of the Real Estate Investment Trusts (REITs). The aim of this article is, based on the data from 1972 through 2017, to describe the sensitivity of REITs' total returns to those of the stock market and to the dynamics of interest rates, and to compare the findings with previous research published during the 1990s in order to identify any shifts in the market behaviour. Our OLS regression models will study the effects of the stock market performance and changes in interest rates on both the equity and mortgage REITs. As we will demonstrate, REITs remain sensitive to the stock market performance, but changes of interest rates have little temporary effect on their performance. Contrarily to popular beliefs, there is little evidence that long-term oriented and diversified REIT investors should be overly concerned about rising interest rates.
Highlights
Ever since the concept of equity trading was introduced to the public, investors have been striving to discover the best ways to beat the market
Real Estate Investment Trusts (REITs), investment vehicles introduced in the 1960s and primarily focused on income-oriented investors, have consistently outperformed the rather conservative bond investment funds in total return measures
5 Conclusion My models suggest that REITs are unable to isolate their performance from temporary fluctuations of the economic environment completely
Summary
Ever since the concept of equity trading was introduced to the public, investors have been striving to discover the best ways to beat the market. Real Estate Investment Trusts (REITs), investment vehicles introduced in the 1960s and primarily focused on income-oriented investors, have consistently outperformed the rather conservative bond investment funds in total return measures. Due to their generous payout ratios exceeding 90% by law, widely perceived safety thanks to the real estate collateral, and relatively low cost of capital, REITs have become an effective way in which stockholders could participate in real estate investments. Some authors have pointed out the potential risks of such investments that the investors should always be aware of They argue that REITs in their business models resemble sophisticated financial institutions rather than just simplistic real estate owners or operators. The important caveat is that since REITs raise capital through stocks issued at significant premiums to book values, and due Červený, M.: Should REIT Investors be Concerned about Changing Economic Conditions?
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