As investors in the property sector will know, REITs or real estate investment trusts have been one of the worst parts of the market as interest rates expectations have climbed in recent weeks.

Since the middle of September, the average REIT has lost more than 20% with some racking up losses of nearly 30% regardless of whether they are specialist or generalist and regardless of the quality of their portfolio, their average lease duration, their loan-to-value ratio or the interest rate on their debt.

In other words, the selling has been indiscriminate based on fears that higher interest rates will impact returns and property valuations, and by extension NAVs or net asset values, while higher borrowing costs mean less cash to return in the form of dividends.

In addition, the decision by some large open-ended property funds to limit redemptions has added momentum to selling in closed-ends funds as institutional investors have cut their exposure to the property sector by selling what they can.

From a long-term income investor’s point of view, there are now several trusts yielding 6% in the health care, office and retail sub-sectors, while some of the bigger diversified companies are yielding even more such as British Land (BLND) (6.4%) and Land Securities (LAND) (7.6%) according to Sharepad.

Meanwhile the average discount to NAV for the sector has ballooned to 38% according to analyst Justin Bell at Numis, although as he points out some of the valuations used in the calculation will be ‘stale’ as they date back as much as six months.

Bell calculates that the yield ‘expansion’ implied by the drop in prices is as much as 3% for generalist (diversified) trusts and over 2% for office and retail property trusts.

However, if asset valuations were to be cut resulting in an increase in loan to value the good news is that most trusts are conservatively geared so without any ‘defensive action’ by management gearing would remain ‘broadly comfortable’ in the 30% to 40% range.

Another point we would make is that many trusts had already fixed their debt at low interest rates or hedged it against future increases before the rise in official bank rates or the recent spike in gilt yields.

For example, Laura Elkin at AEW UK REIT (AEWU) told Shares recently that the trust had anticipated the rise in rates and refinanced its entire debt at under 3% interest rates back in May.

Meanwhile, AEW is sitting on a sizeable cash pile having disposed of several assets above their most recent NAV and is actually reaping the benefits of higher rates.

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