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The question of when interest rates in the United States would finally start to rise was, until not very long ago, the most feverishly debated topic in all of finance. Now, ahead of next week's meeting of the US Federal Reserve, which most people expect to result in a rate increase, discussion of the issue has become distinctly passe.
Over the last two days, the yield on the US 10-year Treasury gently rose back to the high that it hit back in January while equity markets have remained unfazed by an event that was once expected to cause a dangerous shock to years of post-crisis complacency.
But while most investors appear prepared for this long awaited normalisation of interest rates, there do still appear to be pockets of the market that may not be as prepared as they should be. Shares of US listed residential real estate investment trusts, which actually concentrate on shopping malls, have for years been in demand due to their ability to provide income for yield starved investors in a low interest rate world. These now appear especially vulnerable to these changed circumstances.
Following the crisis, the value of US regional mall operators surged with the Bloomberg index that tracks it rising five times from its trough in 2009. More recently, concerns over the health of regional US mall operators, and their tenants, have weighed on the sector sending the index down by a quarter since last August.
Investors have increasingly fretted over how severe the impact of e-commerce will be on the large bricks and mortar retailers that pay the rent of these mall operators. Then there are worries that the US is just simply over-malled with the country having five times the amount of malls on a per capita basis than the United Kingdom and double that of Australia, according to Horseman Capital.
Given these concerns, it appears strange that in a world expecting higher interest rates that shares in many of these US mall REITs currently offer yields priced at very slim spreads above US government debt. Compared to the yield reached this week for the US 10-year treasury, which was about 2.5%, shares in GGP, a US REIT with regional shopping malls across the US, yield just 3.68%. Shares in another arrival, the Masaryk, offer 4.3%.
If US interest rates are to rise where the market currently expects them to, then these REIT yields will appear far less attractive in the future. Meaning their share prices may still have a lot further to fall.
