Checklist for REITs and Bank Stocks: Risks to Verify Behind the Light and Shadow of Interest Rates

The Bank of Japan raised the policy interest rate to around 1.0% in June and to around 1.25% in September. It was kept unchanged at the meeting on October 30. During this period, there has been a significant divergence in the stock prices of banks and REITs over the past year. However, bank stocks have fallen significantly since the beginning of October.

This article does not provide a conclusion on whether to buy or sell. This is because I have neither the qualifications nor the grounds to do so. Instead, I will: 1) confirm what actually happened to stock prices as facts, 2) examine the possible background (hypotheses) and risks that are easy to overlook, and 3) create a checklist for you to make your own judgments.

1. What has happened in the past year (facts on stock prices)

These are the rates of change in stock prices for bank stocks (79 issues) and REITs (61 issues). These are the medians for each group, and dividends/distributions are not included (as of October 30, 2026).

Bank stocks have increased by approximately 2.6 times over two years, while REITs have fallen by about 20% year-to-date. On the other hand, bank stocks have fallen significantly by -13.4% in the last month. The reason for this decline has not been confirmed.

Aggregation conditions: Bank stocks are the 79 issues in the banking sector on the Tokyo Stock Exchange, and REITs are 61 issues with prices out of the 62 issues classified as “REIT/Fund” in my database. The target is currently listed issues; delisted issues are not included. The rate of change in adjusted closing prices is calculated for each issue, and the median is taken. The starting point is based on the most recent business day: 1 month = 9/30, 3 months = 7/30, year-to-date = 1/5 (the first business day of the year), 1 year = 2025/10/30, and 2 years = 2024/10/30. Issues without prices at the starting point are excluded, so the 1-year and 2-year figures for banks are based on 78 issues. The magnitude of the difference changes if dividends/distributions are included, but this has not been calculated this time.

Possible background (hypotheses)

According to the Bank of Japan’s announcements (June 16, 2026, September 18, and October 30), the target for the uncollateralized overnight call rate was raised to around 1.0% on June 16 and to around 1.25% on September 18 (7 votes to 2 in September). On October 30, it was kept at around 1.25% (8 votes to 1), with one dissenting member proposing a hike to around 1.5%. Regarding the future outlook, Daiwa Institute of Research’s report on September 18 anticipates a rate hike to around 1.5% in December and to around 1.75% in the January-March quarter of 2027 (this is a private sector forecast, not a decided matter).

This rate hike is seen as one factor for the difference in price movements between bank stocks and REITs. However, other factors such as the economy, real estate market conditions, and supply and demand in the overall stock market also have an impact. The fact that the rate hike and stock price movements occurred at the same time does not confirm that interest rates were the cause.

What is important here is that this difference is “already reflected in stock prices”. Please do not forget that we are talking about bank stocks after they have risen and REITs after they have fallen.

2. Bank stocks: Risks that are easy to overlook

The tailwinds are easy to understand, so I will omit them. What I want to check is whether they are over-priced, and the costs behind the tailwinds.

① Possibility of being “overbought”

The median has increased by about 2.6 times over two years. Individually, there are 6 out of 79 issues that have more than doubled year-to-date. The positive factor of improved interest margins may already be significantly reflected in stock prices. I cannot judge whether the decline in October is the beginning of an adjustment or just a temporary event.

② Competition for deposit interest rates

If lending rates rise, profits will increase, but at the same time, the interest rates to attract deposits will also rise. If competition for deposits intensifies, the improvement in interest margins will be smaller than expected.

③ Unrealized losses on held bonds

When interest rates rise, the prices of bonds held by banks fall. It is necessary to check the “valuation difference on available-for-sale securities” in each bank’s latest financial statements to see if valuation losses are expanding.

④ Loan loss costs (credit costs)

When interest rates rise, the burden on borrowing companies and individuals increases. If bad loans rise when the economy worsens, it will eat away at the improvements in interest margins. Even if there are no major problems visible at the moment, this is a factor that will surface only after the economy deteriorates.

5. The ‘Stopping Point’ for Rate Hikes

What affects bank stocks is the ‘pace’ and ‘terminal point’ of rate hikes. If they stop sooner than the market expects, expectations may collapse.

6. The Limits of My Score

In my scoring, banks receive a low score for ‘financial safety’ (average 17 points). This is because banks are a business model built on liabilities in the form of deposits, which does not mean they are dangerous. Banks and REITs are sectors not accounted for by my score.

3. REITs: Risks Easily Overlooked

It is tempting to view REITs as ‘undervalued because they have fallen.’ What you want to check is whether the reason for the decline is still ongoing.

1. Spread with Long-Term Interest Rates

The appeal of REITs is their distribution yield, but as government bond yields rise, the gap narrows. According to the document published by Asset Management One on August 31, Japan’s 10-year government bond yield rose from the 2% range at the end of 2025, briefly reaching the mid-2.9% range in mid-August. The description states that the TSE REIT Index hovered around 1,800 points, and was sold off to a level where the distribution yield reached the 5% range. Since these are figures from August, please check the latest 10-year bond yields and REIT distribution yields yourself.

2. Refinancing Costs

REITs buy properties using debt. When the debt matures and needs to be refinanced, if interest rates have risen, interest payments will increase and put pressure on distributions. This impact will take effect with a time lag because it appears little by little each time the debt matures.

3. Rental Market Remains Solid for Now

On the other hand, the same document published on August 31 states that office rents in Tokyo’s five major wards are expected to reach their highest level in the past 10 years in July 2026, and the vacancy rate is also on a downward trend. In other words, even though stock prices are falling, the figures in the rental market have not yet collapsed. Whether this gap will narrow or widen in the future is the turning point. Please check the actual distribution results in the financial statements of each investment corporation.

4. Dilution Due to Capital Increases (Public Offering)

REITs increase capital when buying new properties. If the stock price is sluggish, it becomes difficult to issue new shares, and growth stops. Conversely, if they increase capital at a low price, the value per unit is diluted.

5. Ceiling on Real Estate Prices

Even if interest rates rise, as long as property prices and rents continue to rise, they can hold out. When property valuations begin to fall, a reassessment of Net Asset Value (NAV) occurs, which affects REIT prices in two ways.

6. Outlook for Additional Rate Hikes

As long as the outlook for policy interest rates leans toward ‘even higher,’ the weight on REITs will continue. Although they were kept on hold on October 30, some in the private sector expect an additional rate hike in December. Conversely, when the end of rate hikes comes into view, it is likely to be a turning point for REITs. However, this is a forecast and not a guarantee.

4. Checklist for Making Your Own Decisions

I will not name individual stocks. These are items to check in the financial statements of each company or investment corporation.

When considering bank stocks

• [ ] The results of the next Bank of Japan meeting and the subsequent interest rate hike outlook (the level priced in by the market)

• [ ] The increase in deposit interest rates (the difference from the increase in lending rates) and the interest margin outlook provided by the company

• [ ] Valuation gains and losses on securities (valuation difference on other securities) and their impact on equity capital

• [ ] Changes in credit costs

• [ ] How many times the stock price has already risen (expectations after the price has peaked)

When considering REITs

• [ ] The difference between the 10-year government bond yield and the REIT distribution yield

• [ ] The average interest rate on borrowings and the breakdown of fixed versus floating interest rates

• [ ] Refinancing plans for the next 1–2 years and the LTV (ratio of interest-bearing debt to total assets)

• [ ] Increases or decreases in distribution forecasts (reasons for changes) and the presence of excess profit distributions (distributions exceeding earnings)

• [ ] Changes in the valuation of held properties (NAV multiple)

• [ ] The level of the investment unit price (is the situation conducive to capital increases?)

Common to both

• [ ] Are you looking at the median of the entire industry rather than just a few stocks?

• [ ] Are you making decisions based solely on “buying because it went up” or “buying because it went down”?

• [ ] What is your investment horizon? (Interest rate movements occur over a span of several years)

Conclusion

Bank stocks and REITs are affected by interest rates in different ways. However, combining them does not necessarily offset interest rate risk. Banks are affected by deposit rates, bond holdings, and the economy, while REITs are also affected by borrowing rates, property earnings, and real estate prices. In scenarios where “interest rates stop rising sooner than expected” or “the economy worsens,” both may decline.

When I select stocks for paper trading, I look at individual performance rather than the industry sector. Please do not use the content of this article to make buy or sell decisions, but rather use it as a checklist for review.

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This article is a record of the author’s research and verification, and it does not recommend the buying or selling of specific stocks, industries, or financial products, nor does it constitute investment advice. The figures mentioned are as of the time of writing, and for parts based on external materials, please verify them with the original sources. Past price movements do not guarantee future results. Please make investment decisions at your own responsibility.