’80s villains, REITs now attract eyes of investors

Earlier this month U.S. Fed Chair Janet Yellen confirmed the Fed’s intention to raise the interest rate within the year, despite the problems in Greece and a financial market skid in China.

And REITs (real estate investment trusts) have come into the limelight as a sound investment vehicle in a higher interest rate environment.

When interest rates rise, expectations for rate of return from investment products like REITs that give out monthly returns also tend to get high.

That is why the popularity of products that pay monthly interest or other returns fizzles in an upward interest rate environment. Because property holdings also tend to have a higher portion of debt, financial costs of a higher interest rate are usually associated with properties investments.

But then why are REITs popular when the interest rate is about to go up? Experts say one should pay attention to the background.

“The Fed’s rate hike means the U.S. economy has recovered that much,” said Ko Eun-jin, an analyst at Hana Daetoo Securities.

“A fall in the unemployment rate, a rise in wages and improvements in consumer sentiment also lift rental fees and reduce vacancy rates, good news for REIT funds that own and manage these properties,” Ko added.

Indeed, statistics have shown that despite the rate hike worries, a steady rise of one-person households has kept demand for multiplex homes robust, as did demand for warehouses due to popularity of online shopping malls.

And during the period from 2004 to June 2006, when the U.S. Fed raised the interest rates 17 times by 0.25 percentage point each to stem the effects of a commodities price rally, high-yield bonds and REITs broadly saw their returns go up.

“During a year following the rate hike, global REITs saw a 32.1 percent rate of return, while U.S. REITs saw a 26 percent return,” said Oh Jae-young, an analyst at Hyundai Securities.

“Economic recoveries, which tend to raise rental fees, play a bigger role than the rate hike itself.”

Developed market equities are also seen as promising.

“The U.S. rate hike has been expected so that has already been reflected in the equities market,” Oh said.

“We need to pay more attention to European, Japanese and U.S. equities markets that are set to benefit from stimulus measures in Europe and Japan and economic recovery in the United States,” Oh added

BY JUNG SUN-EAN [park.jungyoun@joongang.co.kr]