much correlation there really is between
rising interest rates and REIT share prices.
Based on the historical record, there’s less
of a correlation than you might think.
The white paper looked at seven periods
of rising interest rates between 1972 and
2007, taking into account the differences in
the REIT sector of 30 or 40 years ago compared to the modern era. “Many of the
REITs that existed in the 1980s and the early
’90s were very much passive,” Burland East
tells Forum. East is CEO of American Assets
Capital Advisers LLC, the sub-adviser portfolio manager to the Altegris/AACA Real
Estate Long Short Fund.
In those days of a smaller, less cohesive
and less active REIT sector, rising interest
rates appeared to have at least a 50/50
chance of hurting the companies’ stock
prices. Between 1972 and 1974, the federal
funds rate rose from 3.3% to 12.9%, while
REITs lost 39% of their value. “This, of
course, corresponds to the 1974 bear market, which up until now, was the worst downturn since the Depression,” according to the
Altegris white paper. However, between 1977
and 1981, during the era of the so-called
Volcker Squeeze, the Fed funds rate
increased from 4.6% to 19.1%, while REIT
conditions change you
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share prices surged ahead by 110%.
Fast-forward two years to 1983, and the
Fed funds rate saw another increase from
8.5% to 11.6% over a 12-month period,
while REITs gained 23%. Then between
1986 and 1989, the fed funds rate rose from
5.9% to 9.9%, while REITs lost 3.3%.
“The modern REIT era began in 1993
when the Umbrella Partnership (UPREIT)
was codified, allowing large real estate companies with low-basis assets to access the
public market in a tax-efficient fashion,”
according to the white paper. “This
unleashed the market we now see, with
larger, vertically integrated, professionally
managed real estate operating companies.
These companies have more sophisticated
capital raising and allocation models, and
are typically more adaptable.”
In fact, most of the publicly traded REITs
around today did not exist before 1993.
This era saw three distinct periods of rising
Fed funds rates: between 1993 and 1995, in
which the rate rose from 2.9% to 6.1%;
between 1999 and 2000, when it rose from
4.9% to 6.5%, and between 2004 and 2007,
when the rate rose from 1% to 5.3%. In all
three periods, REITs experienced positive
returns, most dramatically in the 2004 to
2007 era, which saw share prices increase
99% in three years.
“If you’re actively running a company,
when market conditions change you can
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