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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Benkea who wrote (49266)	5/3/2000 7:44:00 PM
From: Mark L.	Respond to of 99985

"I would think REITs would be a good inflation hedge." You'd be right. First, rent increases are almost always inflation indexed. Second, many are quite leveraged so the value of the properties rise while the value of the debt remains the same (actually becomes less in real terms). That's not exactly correct. The value of the properties does not rise, since there is a strong inverse correlation between real estate asset prices and interest rates (which are, in turn, well-correlated with inflation). What does rise is net income (or at least the part of gross income which is rent, as opposed to triple net expenses). To the degree that REIT's are simply another kind of income vehicle, the price of the vehicle is inversely proportional to prevailing interest rates. This would also dampen REIT price increases. Finally, after a lag the income of REIT's responds to prevailing economic conditions. Recessions bring on higher vacancy rates. Once again, this would (after a lag) dampen REIT price increases. However, the primary determinant of REIT prices is their sexiness to the market. This varies on some scale that defies my ability to predict. However, I'm sure that some wag will show a graph correlating them to Neptune's moons and the length of Humphrey-Hawkins testimony.