Will ASX REITs get smashed by rising interest rates?

If shares are tanking this year, perhaps real estate could save us? An expert answers whether this theory is right.

| More on:
a man sits on a ridge high above a large city full of high rise buildings as though he is thinking, contemplating the vista below.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

ASX shares, like the rest of the world's, are down a shocking amount for the year.

The S&P/ASX 200 Index (ASX: XJO) is now 7.8% lower than when 2022 started.

The big fear is that interest rates will rise very soon.

Investors are worried that central banks will be forced to hike rates due to persistent inflation, which will only be exacerbated by the war in Ukraine.

One type of investment that's arguably a little bit different to other ASX shares is real estate investment trusts (REITs).

Since these are investments in real estate, they're not really like other shares, which represent ownerships of businesses.

So can real estate fare any better in such anxiety-ridden times?

Shaw & Partners portfolio manager James Gerrish was recently asked this very question from a punter.

Not all REITs were created equal

Speaking generally, Gerrish said rising rates are a negative influence on the value of REITs.

"However, they will impact different REITs in different ways," he told his Market Matters newsletter.

But if one drills down into individual trusts, they all have very different characteristics.

"Goodman Group (ASX: GMG) will grow earnings at 20% this year so rising rates will influence them less as a proportion of their earnings," said Gerrish.

"The Charter Hall Long WALE REIT (ASX: CLW) will be more impacted because their growth is slower and their lease terms longer. It's more like a longer-dated bond."

Goodman shares have fallen 17% for the year, while Charter Hall Long WALE has remained flat. The latter is paying out a 5.45% dividend yield.

Another example that could be less impacted by rate hikes is National Storage REIT (ASX: NSR).

"National Storage, that we own, has a large tailwind from high demand and tight supply of storage which is pushing up storage rates — and therefore earnings."

Shares for National Storage have dipped 5.6% for the year, while paying out a 3.46% dividend yield.

REITs could be oversold

Gerrish feels like investors may have overreacted during this year's market dip.

"I think recently the market became more concerned about rates and their impact on REITs than is warranted," he said.

"The sell-off in the property space over the past few weeks or so is a buying opportunity generally."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on REITs

a man with hands in pockets and a serious look on his face stares out of an office window onto a landscape of highrise office buildings in an urban landscape
REITs

Is it time to grab these cheap ASX 300 stocks before it's too late?

Here’s why these ASX shares seem very cheap in my view.

Read more »

Group of successful real estate agents standing in building and looking at tablet.
Opinions

Should ASX REITs be on your buy list right now?

Analysts offer their views.

Read more »

An older couple dance in their living room as they enjoy their retirement funded by ASX dividends
REITs

Why I think this could be the #1 ASX property stock for retirement

I believe this stock is offering everything that retirees could want.

Read more »

Boys making faces and flexing.
REITs

These 3 ASX index-beaters are setting new records today (I'd still buy)

I think these stocks still have plenty of growth potential.

Read more »

A business woman flexes her muscles overlooking a city scape below.
REITs

Why ASX property shares could be set for a comeback

The recovery could be strong, too, according to one global investment giant.

Read more »

An Australian farmer wearing a beaten-up akubra hat and work shirt leans on a fence with livestock in the background and a blue sky above.
REITs

Why I'm more bullish than ever on this ASX 300 dividend stock

This is a leading passive income share, in my opinion.

Read more »

a man with hands in pockets and a serious look on his face stares out of an office window onto a landscape of highrise office buildings in an urban landscape
REITs

Is now the time to consider this heavily discounted ASX 300 stock?

Could this be one of the deepest value stocks on the ASX?

Read more »

Two businesspeople walk in opposite directions on a staircase with arrows under their arms, one pointing up and one pointing down.
Earnings Results

One up, one down: ASX REITs vary after FY24 results

Two very different outcomes for these REITs after their FY24 results.

Read more »