Dividend Chaser on Reits yield and interest rate increase

Pros of rising interest rates

When interest rates rise, it generally also means that the economy is growing.

1. Rent revision up
2. More yield accretive assets
3. Current Assets rise in value
4. Rising interest rates reduces the propensity to build new properties thus reduces supply

Cons of rising interest rates

However, there are more negative aspects as well

1. Maintenance cost rises
2. Property costs rises
3. Debts are re-finance at higher interest rates
4. Rising floating interest rates reduces dividend payouts
5. Rising interest rates reduces the propensity to build new properties thus reduces supply

Rate of rise in interest rates

Much of whether rising interest rates is good for REITs or not really depends on how predictable the rate of rise.

If the rate of rise is slow and predictable,

1. Rent revisions greater than rising property expenses result in increase dividend payouts.
2. Economy expands well and provides opportunity for most REITs to correct their mistakes and make use of the opportunity.
3. REITs are able to revised rent higher or make good acquisitions as compared to lower-risk financial assets.

If  the rate of rise is too fast and unpredictable,

1. Rent revisions could not keep up with other costs
2. Re-finance of debts at much much higher rates cuts dividend payouts
3. Lower-risk financial assets become much attractive compared to REITs. REITs price would have to revise down to stay competitive.