Interest rates are the dominant variables for all high-yielding asset classes including REITs. But after the election of Donald Trump, a Fed rate hike is no longer a hot topic of discussion. Instead, the narrative has shifted to the heights that Treasury yields will end up seeing.

This is because amid encouraging domestic economic data, rate hike appears imminent this week. But Trump’s promise of strong fiscal stimulus accelerated the bond rout over the past one month. Therefore, yields, which move inversely to bond prices, are on a torrid run. Amid this, REITs, which are often considered as bond substitutes for their high-dividend-paying nature, lost their shine.

However, REITs staged a rebound on Dec 7, amid a decline in yields following apprehensions surrounding the European Central Bank (ECB) meeting. Yet, as soon as ECB extended the bond buying program and decided to taper the amount on Thursday, yields started to ascend again.

While these hiccups in the bond market made REIT investors jittery about their investments, a closer inspection, however, reveals that the industry is not so much threatened by the movement in Treasury yields. This is because although the yields on the 10-year Treasury notes climbed to 2.47% from 1.88% on Nov 8, the corresponding impact on the S&P 500 REIT industry group has been less significant.

This indicates that despite the looming rate hike and the bond rout, investors believe that there is adequate fundamental strength in the industry and sufficient scope for REITs to excel under Trump’s presidency.

This is because fiscal stimulus like tax reduction and infrastructure spending boost demand, fuel economic growth and push up inflation. And when economic growth picks up steam and inflation rises, prices of real estate and rents of properties also increase.

More lucidly, a recovery leads to stepped-up economic activity that in turn increases demand for space from retailers, manufacturers, distributors, offices and renters. Also, the fatter wallet of both consumers and corporates implies a better rent-paying ability.

Further, Trump’s intention of easing regulations on financial services, would help mortgage loan borrowers. So, demand for homes is expected to grow and prices are likely to surge. And finally, credit spreads are expected to be lower in this environment. So, borrowing and purchasing activity is expected to get a further thrust.

Therefore, if investors can manage short-term hiccups in Treasury yields and digest the rate hike issue, the strengthening of the REIT industry will likely ensure solid long-term gains. Also, these hiccups can offer you solid entry points.

Currently, stocks like Armada Hoffler Properties, Inc. (AHH Quick QuoteAHH - Free Report) , Urban Edge Properties (UE Quick QuoteUE - Free Report) , Mack-Cali Realty Corp. and Preferred Apartment Communities, Inc. enjoy a Zacks Rank #2 (Buy). Their favorable rank is backed by solid estimate revisions, suggesting analyst bullishness on the stock.

Moreover, their price performance over the past one month is pretty impressive. In fact, shares of Armada have gained 4.6% against the 0.7% increase logged by the Zacks categorized REIT- Equity Trust – Residential industry. Urban Edge shares too climbed 6.3% against the REIT – Equity Trust – Retail industry’s 1.1% increase.  

Further, Mack-Cali ascended 8.5% against the REIT – Equity Trust – Other industry’s 4.9% gain. And finally Preferred Apartment Communities logged in 6.9% returns against the REIT- Equity Trust – Residential industry’s increase of just 0.7%.

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