Rising Cap Rates Affecting REIT Valuations
Rising Cap Rates Affecting REIT Valuations Rising capitalization rates mean lower real estate values, and this is adversely affecting REIT investments across the board. A capitalization rate is similar to a bond yield, and just like the bond world, as investors demand more yield for a given risk, par values fall.
The same holds true for real estate valuations, yet the relationship is slightly more complex given that “yields” in the real estate market change frequently as rents rise and/or fall. In this environment, rising cap rates coupled with falling rents means that real estate valuations are deflating at a rapid pace. Accordingly, many REIT share prices have dropped 50% or more over the past twelve months.