Contrary to Conventional Wisdom, Real Estate Investment Trusts Do Just Fine in Inflationary Times


Conventional wisdom holds that real estate investment trusts (REITS) are more sensitive to changing interest rates than other kinds of stocks. REITS are companies that buy apartment buildings, shopping malls, office buildings and other properties. The shares of REITS are traded just like any other stock.

Investors think that during periods of low or falling interest rates, the high dividend yields of REITS make them attractive compared to bonds. When interest rates are high, REITS are less attractive because their dividend yield is being eaten away by inflation and they are a whole lot more risky than bonds.

But conventional wisdom is wrong, according to analysts at Morgan Stanley. Using government bond and other data, they found that REITS as whole were far less interest rate sensitive than stocks as a whole. That is, when bond interest rates went down, the price of REITS didn't rise as much as for stocks as a whole. Conversely, when interest rates and inflation were up, REITS didn't fall in value as much as stocks as a whole.

Why is conventional wisdom wrong?

The analysts argue that investors buy REITS as a hedge against inflation. When inflation is high, investors put their money into real estate believing that it will hold more value than, say, stocks.

The researchers also argue that REITS are less interest rate sensitive because they pay big dividends. Investors know they don't have to wait years to get a big return on their investment, so they hold REITS even in inflationary times seeking a pay off now rather than later.

Bottom line: if inflation rears its ugly head, don't be too concerned that a REIT you may own will drop in value.

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