As the Federal Reserve indicates it may be nearing the end of its interest rate hiking cycle, income-generating investments like real estate are likely to benefit, according to industry experts.
In his December remarks, Fed Chair Jerome Powell stated members felt rates could peak in 2024 based on individual assessments about the path forward. To give you more context:
- Fed Funds rate will be seen at 4.6% by end of 2024, down from the current 4.75%.
- 10-year Treasury has already fallen from a 2022 high of 5% to 3.83% now.
- Income assets underperformed in 2022 with rates rising, poised to rebound.
“The Fed’s latest guidance gives us clarity that the tightening cycle is probably in its late stages,” said Tobi Opeyemi Amure, an analyst with Trading.biz. “This outlook is very bullish for yield-oriented investments as the ‘risk-free’ rates of return lose their luster.”
According to Tobi, assets like real estate and REITs were heavily sold off in 2022 due to debt concerns and rising rates diminishing their income appeal. But the tide appears to be turning.
“Now we could be set up for a major reversal where income alternatives like REITs and real estate outperform as investors seek durable yield and distributions.”
Ideal for income & diversification
Closed-end funds with real estate exposure offer characteristics tailor-made for today’s environment, Tobi explained.
“Funds like Cohen & Steers Quality Income Realty (RQI) provide diversified real estate exposure along with consistency and transparency around distributions.”
Key features driving investor demand:
- High 7.8% SEC yield on price, paid monthly
- Diversification across property sectors
- Experienced management team
- Defensive qualities to buffer volatility
With commercial real estate relief on the horizon and the Fed projecting steady, if not declining rates over 2024-2026, Tobi sees substantial upside for vehicles like RQI to reward yield-focused investors.