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REITs Making Headlines on Fed News

Real estate investment trusts are making headlines again, on the news that the ""Federal Reserve"":www.federalreserve.gov/ will continue to drive long-term interest rates even lower. High yielding REIT stocks have dropped accordingly, and the REIT market, which thrives on borrowing at lower rates and lending in the mortgage marketplace at higher rates via the purchase of mortgage-backed securities, has struggled.


However, the REIT markets aren't garnering much sympathy. Many industry analysts note that the segment's avoidance of any default risk courtesy of purchasing government guaranteed bonds should offset the instability caused by interest rate fluctuation.

The Federal Reserve stated recently that the slow-growing economy and high unemployment that continues to facilitate


the current housing slump must be mitigated, confirming its hopes that the lower interest rates will encourage growth in the real estate sector. Its so-called operation ""twist"" targets a reduction of costs for borrowing businesses and consumers, which the Fed views a sort of stimulus initiative.

REITs, which include companies that distribute a minimum of 90 percent of their taxable income to shareholders via annual dividends, earn money based on the difference between low-interest, short-term borrowing and the acquisition of high-interest long-term securities. Thus, the lowered interest rates have a severe if indirect impact on the REIT marketplace.

Additionally, the Securities and Exchange Commission's launch of a new review targeting potential new regulations for REITs has created additional depression in the sector. The SEC plans to hold a public commentary period regarding its proposal to force REITs to fall in line with the Investment Act of 1940. Such an alteration to the REIT, which would essentially re-categorize applicable organizations as investment companies, would likely prohibit the high leverage levels utilized for operations throughout the REIT vertical.

Research group ""Paragon Financial Limited"":www.paragonfinanceltd.com/ examined two key companies affected by the ongoing volatility within the REIT, and the entity's look into ""American Capital Agency Corporation"":www.agnc.com/ and ""CYS Investments, Inc."":www.cysinv.com/, revealed expected movements for both companies. Though its worth noting that REITs are still considered a positive investment for those looking to tap into housing markets overseas.

About Author: Abby Gregory


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