The below graph shows 10 year treasury yield, compared with VNQ (Vanguard REIT Index), while the yield peaked on October and have come down, yet VNQ is going down. For those whoa re new to REIT, the REIT valuation is based on cap-rate and cap-rate is influenced by interest rates.
May be it is time to start looking at historical cap-rates vs interest rates vs current price.
Now, I think we have seen the peak of rate hike, and I am sure FED has broken something, whether it is inflation, banking (specifically regional banking) or economy or may be all of them. No matter what given the regional banking troubles, banks are going to reduce lending and that is going to flow into the economy and slow it down. Where I am going with all this is, the rates are going to go down!!
When that will result in FED cutting the rates needs to be seen. But the trajectory of rates are down. If that’s the thesis, are we at a point where REIT’s are buy? especially ones whose rent’s are not going to be impacted by mild recession?
As you are reviewing, ignore mortgage REIT’s, office REIT’s and any REIT which has significant debt maturing in the next 1, 2 years. Of course there is always some debt to refinance, but debt maturity is more critical than ever. Remember, there is a huge ($1.5 Trillion yeap the big T) worth of commercial real estate is going to come for refinancing in the next 3 years, that means the postman is going to be busy delivering keys to the banks, assuming the bank is around to pick up the keys.
How spectacularly wrong!! When your fundamental thesis is wrong all other assumptions are wrong. Below is the graph of VNQ Performance, the highlighted is the VNQ on March 24, 2023 the original post. So VNQ has moved up a bit.
Whilst Inflation has come down, it is higher than the magical 2% and every month/ report something is keeping it up. But one theme is used car prices, car insurance, home insurance, to some extent rent. Getting car insurance in CA is next to impossible and insurers are actively withdrawing from various markets. So with less competition the prices are going to be strong. Long story short, insurance rates are not going to come down in hurry.
So don’t know what is going to keep the inflation high in next report, but it is not coming down to 2% in hurry. We are looking at very real possibility FED may not cut the interest rate until after the election.
If interest rate stays up and not going to get back to ZIRP, what is the realistic cap-rate for REIT’s, which is going to determine the multiples, prices. I don’t know the answer, I am torn whether to spend any time looking into REIT’s or chase gold/ silver/ bitcoin…
