How high interest rates are impacting REITs
Current interest rates and mortgage rates make buying property for both private and commercial use a miserable prospect for many. Real estate investors have turned to REITS as a safe haven during the storm of higher rates, but is it still a viable investment? Rich Hill, Cohen and Steers Head of Real Estate Strategy & Research joins Yahoo Finance to discuss some of the pros and cons of investing in REITS during this turmoil in the markets.
Hill expands on the current commercial real estate market: "Let's not beat around the bush here, commercial real estate is inherently a leveraged asset class, so that means as interest rates rise, financing costs rise. It is having an impact on commercial real estate, broadly speaking. We have a wave of forthcoming loan maturities over the next several years and a lot of those loans that are maturing were financed with floating-rate debt over the past several years, so I don't want to beat around the bush here again and say there are no issues facing the commercial real estate sector... we just so happen to think that listed REITS are in a much much better position than the broader commercial real estate sector."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Video Transcript
JULIE HYMAN: While there are certainly different fundamentals in the different subsectors, there is one thing that I'm guessing affects them all, and that's rising rates, right? In an environment where if you're-- if what you do is buy real estate as a company and own real estate, then your debt servicing costs maybe have gotten higher. So talk to me about that and how-- or is that more perception than reality as well in terms of the broad effect on the industry?
RICH HILL: Well it's a little bit of both. So let's not beat around the bush here. Commercial real estate is inherently a levered asset class. So that means, as interest rates rise, financing costs rise. And it is having an impact on commercial real estate, broadly speaking. We have a wave of forthcoming loan maturities over the next several years, and a lot of those loans that are maturing were financed with floating rate debt over the past several years.
So I don't want to beat around the bush here, again, and say that there are no issues facing commercial real estate-- the commercial real estate sector, because there are issues facing the commercial real estate sector. We just so happen to think that listed REITs are in a much, much better position than the broader commercial real estate sector.
So let me give you a couple of different facts to support that. First of all, their loan to values are less than 35%. That's pretty conservative. They learned some hard lessons during the great financial crisis in 2008 and 2009 and have delevered their balance sheet substantially. 86% of their debt is fixed for a term of around six years or so, so that really means that they don't have the refinancing risks like maybe some of the broader commercial real estate market does.
And so, case in point, our analysis suggests that there will be a modest headwind from rising interest rates and their need to refinance debt, but it's only around 1.4 percentage points per annum hit to earnings. Again, a headwind, but not anything significant by any means, and I think that's my resounding point to you, and maybe it leads into why these transactions are occurring. REITs are on a much stronger footing than a lot of the broader commercial real estate market, and we think they will prove to be winners from this pullback in valuations that we're seeing right now.
JOSH LIPTON: And, Rich, I'm also interested, just internationally, what looks attractive to you in REITs? Is it China, is it Europe, or no? Would you rather prefer to stay in the US right now?
RICH HILL: Yeah, look, I mean, we-- a couple of points we would make. We do run a global diversified portfolio across listed REITs. We think there is opportunities across the globe at any point in time. A lot of our focus right now is in the United States because it tends to be a leading indicator. So we've seen listed REITs pull back. We've started to see their valuations stabilize while private valuations are still declining.
But I would make the point to you, sort of this lead-lag relationship that we see in the United States with listed leading and downturns in recoveries relative to the private market, it's not unique. We see the same exact opportunities beginning to play out in Europe. We just so happen to think that a lot of the opportunities right now are in the United States, but those next opportunities will be coming in Europe.
