Underlying real estate property fundamentals are healthy and asset valuations are high. However, interest rates are moving higher and a market misalignment has been created where many REITs are trading below net asset value. Tax, policy and legislative changes are also helping set the stage for REIT activity this year. With all this in mind, Trepp LLC has listed some trends that it thinks will characterize the REIT market in 2016.
• It is uncertain how far and fast interest rates will rise, and this is sure to affect REITs long after the Fed’s first interest rate hike. The rate increase indicates that the economy is on solid footing, although higher interest rates will make borrowing, an important ingredient for REIT growth, more expensive. With higher interest rates, investors that had been attracted to REITs for their yields could pull money out in favor of other investments.
• REIT managers will further reposition portfolios to focus on core co