Real Estate Investment Trusts (REITs) face difficulties due to increased interest rates - is it still sensible to purchase them?

Real Estate Investment Trusts (REITs) face difficulties due to increased interest rates - is it still sensible to purchase them?

In the realm of Real Estate Investment Trusts (REITs), understanding the underlying rental income and cash flow strength is crucial for investors in today's market.

While the Net Asset Value (NAV) offers insight into the value of the underlying properties, rental income and associated cash flows provide a clearer signal of a REIT's financial health and income-generating capacity.

Rental income offers a more direct and timely indicator of cash flow strength and operational performance, which ultimately drives dividend payouts—the primary attraction of REITs. NAV, on the other hand, is a snapshot reflecting property values that may lag market dynamics and does not always capture income sustainability or growth potential promptly.

Recent supply constraints from collapsing construction starts and rising construction costs have led to expected rental growth, enhancing cash flow. This improvement may not be immediately reflected in NAVs, causing a discrepancy between market price and NAV that investors can exploit.

Cash flow metrics such as Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO), which relate closely to rental income, are more reliable indicators for REIT earnings and dividend sustainability than accounting-based NAVs.

Current market dynamics—higher interest rates, supply shortages, and demand tailwinds—support a real estate recovery led by cash flow growth rather than asset value adjustments alone. Therefore, focusing on rental income and its growth potential allows investors to align with the REIT fundamentals driving long-term value creation and dividends.

This focus is particularly relevant in the current market environment, where REITs across the board have traded at high double-digit discounts to NAVs (as high as 30%-40% in some cases). This market uncertainty has led institutions to transition out of smaller investment trusts, leaving smaller retail investors as the main players in the smaller market section.

Despite these challenges, there are attractive bargains in the REIT sector, with further acquisitions expected. Notable deals include Segro's acquisition of Tritax EuroBox for £1.1 billion, which boosted its position in mainland Europe, and Starwood's purchase of the London-listed Balanced Commercial Property Trust for £674 million, which saw Starwood pay a premium of 21.5% for Balanced but a discount of 9% to the company's last reported NAV.

In conclusion, while NAV offers insight into the value of underlying properties, rental income and associated cash flows provide a clearer signal of a REIT's financial health and income-generating capacity in the current market environment. As such, it is sensible for investors to focus on income rather than value in the REIT sector for now.

For those seeking further financial expertise and insights, a subscription to our website's magazine offers exclusive access to these resources.

Read also:

• Developing a Sales Strategy: Methods, Sample Plans, and Templates for Sales Plans
• Events that transpired on the night of August 13, 2025.
• Manchester-based entrepreneur Amman Ahmed propelled an unusual venture to an 8-digit empire, without external financing. This is the story of how he crafted a groundbreaking genre in the world of animal-oriented media, one growl and rhythm at a time.
• Cooking Quantity of Beef Corresponds to Citizens' Salaries - Analysts Disclose