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REITs at Their Peaks

Morninstar US Equity Analyst Edward Mui discussed how a rise in interest rates would affect real estate markets 

Morningstar Equity Analysts 13 December, 2016 | 14:29
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As we get deeper into the current real estate cycle, many investors are wondering if the sector is nearing its peak. Meanwhile, interest-rate expectations are weighing on the sector’s valuations. Higher interest rates would put pressure on growth rates and return expectations. To get a better read on the real estate cycle, how a rise in interest rates would affect real estate markets, and the long-term risks to the sector, I sat down with analyst Edward Mui, who covers the sector for Morningstar. Our interview took place on Oct. 31, and his answers have been edited for clarity and length.

Let’s start by looking at the broad picture. Where are we in the real estate cycle? What’s your current outlook for the next 12 months?

Mui: Like the broader market, the real estate sector has been in prolonged recovery since the recession eight years ago. It feels like we’re currently in the later innings of the real estate cycle; many REITs are experiencing historically high occupancies, there is still robust rental growth, and peak valuations are driven by not only the underlying demand for this real estate but also by the lower interest-rate environment that we’ve been in for quite some time. With the potential of a U.S. Fed rate hike, there are a lot of questions right now in the market about where growth and valuations for real estate are going in the next 12 months.

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Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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