How do interest rates affect REIT capital costs?

Interest rates have a significant impact on REIT capital costs primarily because most REITs rely on debt financing to acquire and manage properties. When interest rates rise, the cost of borrowing increases. This means that the interest payments on any loans or mortgages that a REIT takes out become more expensive. As a result, higher borrowing costs can lead to decreased profitability for REITs, as they will have to allocate a larger portion of their income to pay off interest expenses rather than reinvesting it into assets or distributing it to shareholders.

Moreover, as borrowing becomes more expensive, it may also limit a REIT's ability to finance new acquisitions or renovations, which could impact its growth potential. It may lead to a slowdown in expansion if the cost of financing outweighs the expected returns from new investments. Consequently, investors often view rising interest rates as a factor that can negatively affect the performance and attractiveness of REITs.

In contrast, the other options do not accurately capture the relationship between interest rates and REIT capital costs or overlook important economic principles. For instance, the assertion that rising interest rates decrease all types of investments fails to consider the diverse factors that influence different types of investments, while the claim that interest rates have no impact on REIT capital costs