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Higher Interest Rates a Plus for Residential REITs
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Higher Mortgage Interest Rates a Plus for Residential REITs
Higher mortgage interest rates have had a positive impact on demand for
apartments, a plus for Residential REITs. This is because apartment
dwellers are more likely to purchase a home when mortgage rates are lower,
enabling more home buyers to qualify for the loans.
Higher mortgage interest rates have a positive impact on both occupancy
and rental rates for Residential REITs. For this reason, Residential REITs
are our favorite sector for steady growth over the next 2 years.
A recent survey found apartment rents will increase more than 5% for 2006,
compared to less than 3% for 2005 (source: National Association of Realtors).
Another factor is the rate of condo conversions. While enriching apartment
owners able to purchase their apartments, condo conversions pull rental
units off the market, tightening the supply of apartments available for rental.
The condo conversion market was active in 2005, but condos are now in
surplus supply. Sellers are finding it difficult to sell their condos. Residential REITs
have pulled back from condo conversions as a result. This means we will see
continued high occupancy and rental rates increases.
Both 2006 and 2007 should be good years for Residential REITs.
Our favorites include Archstone-Smith ASN, AvalonBay AVB, Camden CPT,
Mid-America MAA, and Post Properties PPS.
Residential REITs may increase dividends, but yields are likely to stay
relatively low, below 4% on average. FFO growth enables stock market performance
for this group.
Comments from REITonAIM 05/30/2006
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