Is the bottom here for REITs?

The FTSE REIT index has been hammered for the past 2 years. From a high of 856 points in Jan 2022, it has fallen to the current level of 711 points for a total loss of 17%. What contribute to this fall and the question going forward is whether the bottom is in for REITs? The FTSE REIT Index hit a low of 661 points in Oct 2022 and rebounded to the current level. From a macro perspective, REITs perform very well in a low interest rates environment. Even in rising interest rates, REITs is still able to outperform provided the rate of increase of interest rates is gradual such as 25 basis point hike. However, if there is a sudden big increase in interest rates such as the Federal Reserve increasing a total of 5 percentage points in less than 2 years, REITs will not be able to take such sudden spike up in interest rates, thus resulting in falling share prices for the past 2 years.

Is the bottom here for REITs?

Where will REITs go from here? I believe that is on everyone's mind now. In order to answer this question, we have to monitor closely a few key data points.

1. VIX

REITs thrive on low volatility environment. When the VIX index spike up during September and October last year, The FTSE REIT index fall to a low 661 points. Many of the big name REITs share price fall sharply. For example, Capitaland Ascendas REIT share price fall to a low of $2.50. The VIX index has remain low since April this year. However, the REIT index, has not move up but fallen instead. Could it mean the bottom is very near for REITs? Of course, the VIX index might spike up again and this will spell trouble for REITs

2. Interest Rates 

This is what most investors use with regards to the performance of REITs. In the recent FOMC meeting in June, the Federal Reserve pause its federal funds rates and Powell signal there could be 2 more rate hikes. Most investors will usually think that since there will be 2 more interest rate increases, REITs will remain depressed. However, as mentioned before, REITs will be able to adjust if the increase in interest rates is gradual like 25 basis points. Hence, if the Federal Reserve indeed just raise two more times with 25 basis points, it could mean REITs could see their share price rally instead.

3. US 10 Year Treasury Yield

In order for REITs' share price to rise, we need to see a stable or falling US 10 Year Treasury Yield. In recent weeks the 10 year yield has been hovering around the 3.6% to 3.8% level. If we continue to see these stable yields and even better the yield fall to around the 3.4% level, we might just see a rally in REITs.

4. Valuation

With the current REIT index falling to 2023 low and the share price of some big name REITs share price falling, the yield of these REITs has become attractive again. Some of the US REITs even has double digit yield, it might just pay off handsomely if one is to invest in them.

Conclusion

These are the 4 key factors one should be aware when determining whether the bottom is in for REITs and the time to buy REITs and make profits at the same time. On one hand, there are investors who do not bother about timing the market as they buy REITs to collect dividend. On the other hand, some argue that with REITs seeing their share price fallen for the past 2 years, the amount of dividend they collect cannot cover the capital losses. Hence, in my view timing the REITs market is very important in order to make both capital gains as well as the dividend that can be collected. FTSE REIT Index