Thus far, the early part of 2022 has been characterised by volatility and price falls. As nominal bond yields have risen, expectations of an increase in rates, assisted by RBA governor Philip Lowe recently describing a rate rise this year as “plausible”.
Not by coincidence, the AREIT sector has fallen by 10.27% so far this year whilst the ASX 200 is down 3.05% (as at 11/02/2022).
We last wrote about the potential impact of RBA rate tightening cycles on AREIT returns in May 2018 (see Conventional wisdom is wrong. Rate rises are good for property trusts).
Back then, the RBA cash rate was at a record low of 1.5% and Lowe was indicating tighter monetary policy. The pandemic caused a change in direction. The RBA cash rate now sits at 0.1% and 11 years have passed since the bank raised rates.
The prospect of higher rates, to paraphrase R.E.M., might feel a little like “the end of the world as we know it’’ but this view is misplaced.
In fact, there’s a strong case that rate rises imply conditions that will be good for AREITs, with historical evidence to support this belief.
All else being equal, as interest rates increase the value of an asset’s future income stream falls. The discounted cashflow models that us analysts use to value AREITs indicate this to be true. History, though, suggests it may not be.
The following chart illustrates AREIT returns through periods where the RBA has progressively increased the cash rate since 1992: