A sell-off in US real estate investment trusts (Reits) has prompted some active managers to look again at the sector in the belief that rate rise concerns are overdone.
Years of historically low interest rates have aided the performance of these trusts, but speculation is building that the Federal Reserve will raise rates again in December. As a result, Reits and other ‘bond proxy’ stocks have begun to sell off. US Reits saw their worst weekly outflows for 13 months in mid-October, as Investment Adviser reported last week.
Fiona Harris, portfolio manager on JPMorgan’s US Equity Income fund, has been looking to add to the portfolio’s US real estate exposure through Reits, but is waiting until the trusts’ discounts to net asset value drop to around 10 to 15 per cent.
She said a US interest rate rise would only temporarily push down valuations on these assets, given the US rate hike cycle is likely to remain gradual in nature.
“US Reits have historically been negatively correlated to rising rates and typically sell off as interest rates rise. [But] we feel that, should this happen, we will be given the opportunity by the market to purchase these companies at a discount.”
Justin Onuekwusi, a multi-asset fund manager at Legal & General Investment Management, said he is holding Reits in the belief that US rates will not rise quickly.
“[We hold] global Reits, and around 60 per cent of the global Reit index is made up of US commercial real estate, so lower rates for longer in the US should be a tailwind for US property.”
The performance of Reits tends to suffer when interest rates rise, as higher rates makes financing a loan to buy property more expensive.
Ryan Hughes, AJ Bell’s head of fund selection, said Reits can help diversify a portfolio, and that global Reits are already a part of the company’s Managed Portfolio Service. If rates were to rise in the US it would not be “a disaster” for US-focused trusts, he added.
“I think the consensus for global interest rates is that they [will] stay lower for longer, which makes Reits attractive. However, US rates certainly have the potential to rise soon, which could take a little wind out of US Reits’ sails.
“I don’t think a small rate rise is a disaster and investors will be more interested in the trajectory and rate of change, which should be low.”
Analysts have long speculated about when the Fed will raise interest rates next, and positive data in the US could mean a hike may not be far off.
This anticipation could mean a December rate rise is already priced in by the market, potentially preventing Reits from sliding too much in the absence of any further hikes.
Anthony Leatham, Peel Hunt’s head of investment trust research, added: “My impression is that a rising or normalising interest rate environment in the US would be negative [for Reits], but I would want to look in more detail at whether this risk has already been priced into the US Reit names.”
