The Effect of Interest Rates on REITs Valuation and Future Returns

Abstract

This article explores the relation between interest rates, REITs valuation, and future returns. Using a dataset on mortgage and equity REITs that spans the 1993–2019 time period, we investigate whether and to what extend nominal and real interest rates, as well as interest rate quality and term spreads, are related to the valuation of REITs, measured by different metrics, and REITs returns in the medium run. The results of our analysis show that interest rates are related to REITs absolute and relative valuation measures, but the sensitivity of REITs valuation to interest rates depends on their original valuation level. Moreover, we provide evidence that lower nominal interest rates and wide quality interest spreads are positively related to future REITs returns in the medium term.