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REITs Gain as Fed Keeps Rates Same, But No Stellar Rally

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Investors in the REIT industry breathed a sigh of relief as the Federal Reserve has again decided not to hike rates this time around. Reflecting this positive sentiment, the FTSE NAREIT All Equity REITs Index increased 1.27% on Wednesday and majority of the REIT stocks ascended.

No doubt, the debt-dependent REITs have long benefited from the low-rate environment as low rate kept their borrowing costs down. On top of this, their dividend payout (which has been the major reason for their attraction) ended up being more attractive than the yields on fixed income and money market accounts in such an environment.

However, with speculations brewing in the market over a lift off this month, REIT stocks have been battered off late. (Read: REIT Stocks in Free Fall, Thanks to Rate Hike Speculation)

Calming their nerves came the statement and supplementary summary of economic projections at the end of the two-day FOMC meeting, revealing a steady rate stance by the Fed this month and most notably, a pull down in expectations of rate increases in the years ahead (per the median projection of forecasts).

Fed officials now project an increase of federal fund rates to 0.6% this year, instead of 0.9% predicted in June. For 2017, rate expectations are down to 1.1%, against the previous estimate of 1.6%. The same rate projection for 2018 is pegged at 1.9%, down from 2.4% expected earlier.

Performance Remains Elusive

Yet, a close look at the gains in REIT stocks yesterday reveals that the optimism has not been robust. Among the S&P 500 constituents, REITs like AvalonBay Communities, Inc. (AVB - Free Report) , Boston Properties Inc. (BXP - Free Report) , Prologis, Inc. (PLD - Free Report) and Simon Property Group Inc. (SPG - Free Report) managed to rise just 1.5%, 1.4%, 2% and 1%, respectively. This is because the chance of a rate hike this year has been kept alive by the Fed.

The statement revealed that the central bank has confidence in the economic growth and recognized its progress from the “modest pace seen in the first half of this year,” but refrained from making the call “for the time being” for gathering “further evidence of continued progress toward its objectives.”

Also, the divergence between the opinions and projections of the Fed officials became much apparent this time with three voting members – Esther L. George, Loretta J. Mester, and Eric Rosengren – advocating a hawkish stance.

Essentially, this reflects a growing consensus among the Fed officials in favor of a rate hike in the upcoming meetings. We believe that the officials now doubt that unless rates start to go up, even at a modest pace, the economy might face overheating.

Bottom Line

The REITs are anticipated to bear the brunt when a rate hike will eventually occur. However, a gradual rate hike will give them sufficient time to adjust their funding needs. So if investors can gulp those hiccups, then there are high chances of solid gains over the long term.

Currently, AvalonBay Communities, Boston Properties, Prologis and Simon Property have a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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