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REITs Sold Off In January On Rate Hike Prospects

REITs Sold Off In January On Rate Hike Prospects

Markets all over the world opened 2022 in negative territory, but REITs posted bigger declines than equities in January.

By Patrick Ma, Director, Listed Products and Research, Admiral Investments

February 4, 2021 – After a rally in December 2021, capital markets started 2022 with declines due to expectations of rising inflationary pressure, a potential reversal of quantitative easing, and higher interest rates. The US Federal Reserve Chairman Jerome Powell indicated that the US is likely to start increasing interest rates in March. The markets have since expected multiple rate hikes and quantitative tightening measures ahead. 

In January, global equities dropped 2.8% and Asia Pacific’s equities fell 4.9%. Performance of global REITs, which declined 6.2% last month, was worse than those of equities, on the back of concerns over the impact of interest rate increases on REITs’ valuations. 

Asia Pacific REITs fared worse than global REITs,  falling 7.4%. Each Asia Pacific REIT market had underperformed its respective equity market, with Australian REITs leading the decline with a 10.5% drop. 

Most noticeably, industrial REITs were hit by market concerns over the effect of rising interest rates on industrial REITs that have long-dated leases. Profit-taking by institutional investors also played a role. Goodman Group dropped 13% during the month.

Despite the sell-off in January, we are still positive about the performance of Asia Pacific REITs in the long-run. While rising inflationary pressure weakened the performance of REITs at the start of 2022, it is likely to support real estate valuation and, thus, those of REITs. In addition, if the Omicron variant turns out to be not as severe as expected, the developed countries are likely to maintain or resume the reopening of their economies, for which we believe regional REITs will be beneficiaries.