REITs Are No Longer Victims of Interest Rates: Property Fundamentals Now Speak Louder

The rise in 10-year US Treasury yields this year has not automatically sunk real estate investment trust (REIT) shares. The FTSE NAREIT All REIT Index posted a year-to-date return of more than 6%, a result that contrasts with the 2022–2024 period when surging interest rates pressured commercial asset valuations. This phenomenon has sparked a new discussion: are REITs now supported more by property fundamentals than by interest rate movements alone?

A recent report from Cohen & Steers shows that the correlation between REIT returns and changes in the 10-year Treasury yield keeps shifting over time. The direction of interest rates alone is no longer a reliable predictor of REIT performance. Seth Laughlin, head of real estate strategy and research at Cohen & Steers, said the 100 basis point rise in Treasury yields over the past year has indeed weighed on debt costs and forced all asset classes to compete with higher yields. "You need to get a better yield than the alternatives, and real estate clearly falls into that category. But at the same time, we're seeing earnings acceleration of up to 9% this year, and it will be similar next year, around 8% earnings growth," he said.

David Auerbach, chief investment officer at Hoya Capital Real Estate, noted that the correlation of REITs to interest rates is now at its lowest level in about four years. In his view, fundamentals are far healthier than reported. He highlighted that 58 of 98 REITs that provided full-year guidance have raised their prospects. "The REIT development pipeline, outside of data centers, is roughly 40% below the 2022 peak and 2019 levels; data centers remain the exception at seven times the 2019 level," Auerbach wrote in a report titled "The Rate Shock That Didn't Break REITs". He added that healthy property cash flows, improving earnings visibility, strong dividend coverage, and better balance sheets have helped REITs absorb the interest rate shock.

Sector performance shows disparity. Hotels and lodging, data centers, and senior housing led with double-digit returns. Meanwhile, multifamily apartment REITs remained in negative territory due to oversupply and weakening rents. However, multifamily demand is predicted to rise as interest rates climb, because fewer people can afford to buy homes. The industrial sector, regional shopping centers, and even offices began posting positive returns despite high interest rates.

"The reality is, beneath the surface, the economy is really healthy, and I view REITs as the landlords for the broader economy," Laughlin said.

For Indonesian investors, this dynamic offers an important perspective. The domestic capital market has similar instruments such as DIRE (Dana Investasi Real Estat) and property collective investment contracts. Although their scale and liquidity are not yet as large as US REITs, the principle is the same: long-term performance depends heavily on asset fundamentals, not merely the direction of interest rates. When Bank Indonesia raises interest rates to maintain rupiah stability, DIRE with quality property portfolios and stable rental income can be a diversification alternative. However, investors still need to be wary of liquidity risk and the sensitivity of the domestic property sector to people's purchasing power.

Looking ahead, the key question is how long REIT earnings growth momentum can last if interest rates keep rising. If new supply remains contained and rental demand is solid, the sector could prove that property fundamentals can indeed overcome monetary pressure. Conversely, if a global economic slowdown pressures occupancy, the correlation with interest rates could strengthen again. Investors are advised to monitor quarterly earnings releases and occupancy data as the main indicators, rather than merely reacting to bond yield movements.