For the second time in three months, The Federal Reserve raised its benchmark interest rate Wednesday. Share prices for senior housing real estate investment trusts (REITs) rallied following the news.
The announcement Wednesday will result in a short-term rate increase to 0.75% and 1% for the federal funds rate, up from the current range of 0.5% to 0.75%. Up to two more gradual rate increases will come this year, according to the Federal Open Market Committee (FOMC) statement put out by the Federal Reserve.
All of the major senior housing REITs—including the “big three,” HCP Inc. (NYSE: HCP), Welltower (NYSE: HCN) and Ventas Inc. (NYSE: VTR)—were up slightly following the rate hike announcement. This is a bit of a different picture than when the Federal Reserve updated its policy late last year announcing the three rate hikes.
The stock market as a whole went up following Wednesday’s announcement, perhaps because some expected the Fed to be even more aggressive on interest rates given current economic indicators. In addition to the REITs, public senior housing provider companies also saw gains in their share prices Wednesday.
With two more planned rate hikes in 2017, it’s still difficult to predict the exact impact on the senior housing industry at this time. Though, with plenty of warning, the impact could already be priced in.
The increases have been long-expected, giving the REITs and other players a chance to prepare. Conventional wisdom states that REIT share prices take a hit as interest rates rise, although some have challenged this notion.
However, there are certain things investors and real estate owners should keep in mind as the changes continue, Michael Knott, analyst at Green Street Advisors, told Senior Housing News.
“The Fed is raising rates on the short end, but the larger question is what happens to rates on the long end of the curve,” he said. “That question is exceedingly difficult to consistently get right, but real estate owners and investors should always keep in mind the ‘why’ behind rising rates. If it’s because real rates are rising, that’s bad for all asset classes, including real estate, but if rates are rising because inflation expectations are also rising, that provides an important level of insulation for property values in the face of rising rates. So it’s important to keep an eye on both interest rates and inflation expectations.”
The Fed is indeed citing inflation in its decision-making regarding rates, and the inflation number is moving closer to the Committee’s 2% longer-run objective, the FOMC said.
Written by Alana Stramowski