Plus, reassessing the relationship between UK interest rates and REITs
The perceived wisdom has always been that reducing, and indeed low, UK interest rates are good for real estate in general. Equally, UK real estate investment trusts (REITs) (with their high dividend pay-out ratio compared to PropCos, and therefore their more bond like characteristics) are thought to be good for real estate. In particular, it has been assumed that there is an interest rate cycle. However, is this still case? Should some of these assumptions be revisited, to determine the true impact of UK interest rates on UK REITs?
In this article we will look at:
- Has the UK interest rate cycle ended?
- Are UK REIT yields influenced by UK and/or US government bond yields, or have they disconnected?
- How have the correlations between REITs and UK equities and bonds moved over time and where are we now?
Firstly then, the interest rate cycle. For this I have taken the period from the mid-70s until the present day to ascertain if a trend is discernible. Looking at chart 1, the evidence seems conclusive.
Chart 1 – UK base rates 1975–2019