CEO says REITs are dynamic and that supply and demand is the most important fundamental
Investors have been urged not to get caught up in the myth that rising interest rates are a negative for REITs.
Jeff Olin, CEO and founder of Vision Capital, said that real estate, historically, should be about 20% of a portfolio and that, if you believe in inflation, the asset class is a great place to be.
In the second part of his interview with WP, Olin said we potentially have a unique scenario given monetary policy. Typically, inflation is accompanied by higher interest rates but with central banks committed to keeping rates lower for longer, they’re likely to engage in yield curve control.
He explained: “You may have an unprecedent scenario where you have relatively lower mortgage financing costs for REITs, so the interest costs are going to be relatively lower and yet the value of their assets and rents may be going up because of an inflationary environment. That is interesting.”
But what if inflationary pressures mean rates eventually increase? The biggest myth, Olin insisted, is that this will negatively impact REITs. The Vision Opportunity Fund – a long-short fund targeting superior risk-adjusted total returns – focuses on buying real estate cheaper in the stock market than one can in the property market by looking at the underlying net asset value of the real estate the REITs own and then comparing it to the public market.
Olin stressed that his strategies are designed to outperform whether prices go up or down but he said the myth comes from the simplified valuation equation for real estate that value equals the net operating income divided by a cap rate.
He said: “What we focus on is the numerator, net operating income, because in our experience, supply and demand fundamentals trump interest rates. I don't care if the rates are going up or down.
“If interest rates are going down, and you have too many office buildings being built in Calgary at the same time, there's a big reduction in demand because energy’s coming down and Calgary office building values are going down, not up.
“You have to ask yourself, why are interest rates going up? If it's a credit crisis, that is brutal for real estate. If it's inflation, it's good for real estate. Go back three years ago, after Donald Trump got elected in the U.S., the 10-year spiked from 160 to 300 basis points because the economy was strong and there were jobs.
“If you see interest rates going up because of strong economic activity, that's good for real estate; forget the theory.”
Olin also laid down some stats. Between 2004 and 2006, the U.S. Fed increased interest rates 17 times, from 1.25%. to 5.25%. Over that time, U.S. REITs returned 58%, stocks 16%, bonds 6%.
He added: “REITS aren't bonds, they're businesses and they’re dynamic, and supply and demand determines the outcome and value just like any other industry in any other business. You have to watch some of the mythology.”
