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Quarter-End Insights

REITs: Tread Carefully in This Low Interest Rate Environment

Rising interest rates could be a major valuation headwind for REITs, so investors should focus on moaty landlords with good growth prospects and attractive relative valuations.

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  • U.S. REITs appear overvalued as a group, with pockets of opportunity in the health care, retail, and cell tower property sectors. We maintain the view that security prices of listed Australian property stocks have generally decoupled from underlying fundamentals, and also generally appear pricey.
  • Capital is increasingly flowing across borders for property investments, and property values are high.
  • With acquisition prices high, more REITs are expanding their development pipelines, with initial yields projected to be 200 basis points or more above acquisition cap rates.
  • We generally expect REIT prices to move inversely with changes in long-term government bond yields, and we would expect REITs to generally underperform in a rising interest-rate environment.


Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.