Fall of REITs Puts Their Rhythms in Doubt --- Report in the Wake of Last Year's Performance Roils Debate About Correlation With Rates; 'There Are Other Factors at Play'
Do bonds and REITs march to their own beats?</br></br>That question was the crux of "Urban Legend: The Myth of REIT Interest Rate Sensitivity," a report issued late last year by the National Association of Real Estate Investment Trusts. It argued that the sharp decline in REIT stock prices wasn't so much the result of rising interest rates, but was due mainly to misperceptions by investors.</br></br>The timing of the report was crucial. REIT stocks, which typically perform better than the broader stock market, had been trailing the market since May, when statements by the Federal Reserve prompted yields on Treasury bonds, along with other interest rates, to rise. NAREIT's goal was to convince investors that real-estate stocks shouldn't be viewed similarly to bonds, which tend to experience price declines when interest rates rise.</br></br>But the report also rekindled a debate among real-estate investors about the very nature of REITs, why they have performed so dismally over the past eight months and what lies ahead in 2014 if interest rates continue to rise.</br></br>"The urban myth is that there's a lock-step correlation between rising interest rates and REIT performance. There are other factors at play," says Michael Grupe, an economist with NAREIT. "REITs are clearly not [bonds]. A lot of investors may look at them that way, and make decisions based on that, but it doesn't mean they're right."