Here's the Unvarnished Truth About REITs and Interest Rates

Tim Melvin

The U.S. Treasury 10-year yield has touched 3%, and everyone knows what that means.

As rates have begun to rise over the past few weeks, I've seen a steady stream of REIT-bearish commentaries across the web. Some of them are written in a "War of the Worlds," "the Martians have landed," apocalyptic tone.

"It is just a lose-lose proposition for REITs, and when rates rise, we must sell. It's time for REIT investors to sell! Sell now! No research, independent thought, or discretion needed – just sell immediately!"

You see, the "conventional wisdom" (an oxymoron, kind of like "military intelligence") holds that rising interest rates means falling real estate prices, so real estate investment trusts (REITs) are now… pretty much worthless.

Furthermore, this wisdom tells us that rising interest rates will make the dividend yields of REITs less attractive when compared with fixed-income investment opportunities, so they indeed must sell off to provide higher returns to new buyers. This line of thinking also holds that it will cost more for REITs to borrow money, which in turn will reduce the bottom-line profits.

Well, there's one big problem with all this conventional wisdom and what it's telling us about owning these investments right now…

It's all wrong. Dead wrong.

So if you happen to be tuned into the conventional wisdom, watching T-note yields creep up and dumping your REITs, or, if you don't own REITs, ruling them out as investments on the strength of this panic… you're making a mighty pricey mistake.

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Tim Melvin

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