Which statement about REIT liquidity and sensitivity to market factors is true?

• A. REITs are always illiquid.
• B. REITs offer liquidity but do not respond to rate changes.
• C. REITs are unaffected by interest rates.
• D. REITs offer liquidity but can be sensitive to rate changes and liquidity risk.

Answer: (D)

Publicly traded REITs provide liquidity because their shares can be bought and sold on major exchanges, giving investors an easy way to enter or exit positions. At the same time, they are not immune to the influence of market factors. Interest rate movements affect REIT values: higher rates raise borrowing costs and generally push up cap rates, which can lower property valuations and the present value of a REIT’s future cash flows. REITs also face liquidity risk, especially in stressed markets, when real estate markets and financing tighten. Even though the shares trade, the underlying assets can become harder to value or finance, and access to funding can shrink. Thus, REITs offer liquidity but can be sensitive to rate changes and liquidity risk.