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.

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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.

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