Last year, we pointed out how higher interest rates affect real estate as an investment (See REITs and property stocks get a reality check, Issue 1083, April 24, 2023). This year, it is likely to be the same situation. To reiterate, higher interest rates cause interest expenses to rise; increase discount rates that result in more cash flow needed to be generated by an asset just to maintain its valuation; and increase the cost of capital.
Real estate as an investible asset class can house many functions in an investor’s portfolio, if you pardon the pun.
Economic theory and data show that real estate as an asset class has a low correlation to stocks and bonds, making it a potential diversifying tool for the investor’s portfolio. Real estate could also be an inflation hedge as property prices tend to rise in tandem with inflation. Other macroeconomic factors certainly play a part in real estate returns, namely interest rates.
