Fitch Findings: QE3 a Good Thing for Equity REITS

According to global rating agency Fitch Ratings, QE3 will have a meaningful impact on equity REITs.

Steven R. Marks, managing director, REITs Fitch Ratings

Last week, the Federal Reserve announced a third round of quantitative easing (QE3) to stimulate the stagnant national economy. This means the central bank will buy up $85 billion worth of assets each month between now and the end of the year.

According to global rating agency Fitch Ratings, this federal government action will have a particularly meaningful impact on some REIT sectors—and if QE3 achieves what it sets out to do for the national economy, equity REITs overall would benefit in the long run, approximately 12 to 24 months later.

“To the extent not already factored into current pricing, QE3 should continue to maintain long-term interest rates at low levels, which will improve equity REITs’ borrowing costs, particularly as REITs refinance more expensive debt with lower-cost funding,” Steven Marks, head of U.S. REITs for Fitch told Commercial Property Executive. “Rental income should also improve, to the extent QE3 bolsters job growth and stimulates the economy. Job growth will drive tenant demand for office space and retail sales, which should result in higher rents for office, retail and industrial properties.”

The Federal Open Market Committee directed the Fed to begin purchasing $40 billion worth of mortgage-backed securities each month on an open-ended basis; the agency will continue purchasing bonds until the labor market shows significant improvement. In addition, the central bank stated it now expects to keep short-term interest rates near zero until mid-2015, beyond its previous estimate of late 2014.

While the U.S. stock market had rallied after the Fed’s decision, with the Dow Jones Industrial Average closing Friday at its highest level since December 2007, some skeptics of the program perceive the stimulus to be useless to the nation’s money woes and a detriment down the line. Fitch, however, states that ownership and long-term financing of commercial assets ties equity REIT performance closely to the general economy. If the plan maintains or causes a drop in long-term American Treasury rates, then a decline in all-in borrowing cost for REITS would follow suit. There is also a prediction that lower long-term rates could attract investors to allocate to REITs.

“Competitive pressures are inevitably a major influence on underwriting as borrowers take advantage of funding alternatives available in the market to secure the most favorable terms and pricing,” Marks added.

Fitch concluded that the maintenance of low interest levels could also have a remotely positive impact on sectors of the ABS market, including auto and credit card ABS, by keeping borrower interest rates low.