Most REITs have pulled back this year as a result of irrational fears related to rising interest rates. Keep in mind though that REIT valuations are now somewhat opportunistic, and in some cases even cheap.
I like to remind investors that the value of the real estate that you see on your drive to work, or on your way to the grocery store, etc? has not fallen by 3.5 percent since January. However, that?s what Mr. Market thinks.
Most importantly, income growth in the REIT universe is healthy across most property types as a result of accelerated demand and limited supply.
Again, look outside your window and you will see that while construction activity is increasing across the land, there is still limited new supply and that?s why shopping centers, apartment buildings, and industrial properties are filling up.
So why is Mr. Market providing us with a REIT discount?
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Answers vary and I believe it has a lot to with supply and demand too.
Not brick and mortar though, but fixed income.
You see, when rates do begin to rise the high-paying dividend sector will be forced to compete with other fixed-income alternatives and that means REITs will not have the same ?Tony the Tiger? shelf space they now enjoy. Or maybe they will?
REITs are not bonds. Remember that REITs pay high yields because they must payout at least 90 percent of taxable income to shareholders. While many of the leases are ?bond-like? REITs operate efficiently meaning they can increase profits through good management or increase rents with higher demand.
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