Fitch: U.S. REITs Surge, Private Label RMBS Sputter in Low Rate Environment

While low interest rates have served as a boon in many respects for U.S. real estate investment trusts, they have been unable to support a sustained recovery in private label residential mortgage-backed securities, said Fitch Ratings, New York.

Fitch said multifamily REITs have bypassed the secured lending market, sticking with unsecured debt because it has helped to enhance their financial flexibility. Most of the secured debt within the REIT housing space is being accessed by single-family rental REITs, with more than $13 billion in CMBS debt issued since 2013. While low interest rates have benefitted corporate real estate owners, the story is more mixed for current renters.

“What low interest rates mean over time, is that the marginal renter is probably going to become a potential homeowner,” said Fitch Managing Director Steven Marks. “Although low interest rates do improve affordability, renters are still limited to some degree by mortgage availability.”

REITs are also tapping the RMBS market, Fitch said, with more than one-third of prime RMBS issuance emanating from REITs, said Fitch Managing Director Grant Bailey. But the low interest rate environment has constrained investor demand by reducing yields and increasing prepayment risk.

“Over time, REIT RMBS issuers will likely expand the credit box in an effort to generate additional volume at more attractive spreads,” Bailey said. Several REITs and other non-bank lenders have introduced programs to reach a broader spectrum of qualified borrowers and it’s likely we see meaningful growth in that area over the next couple of years.”