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Nordby: REITs Positioned Well for Long Term

10/29/2010 | By Allen Kenney

U.S. REITs are cooking in 2010. According to Hans Nordby, director of advisory services for Property and Portfolio Research (PPR), that strong performance is no flash in the pan.

Through the close of trading on Oct. 28, the FTSE NAREIT All REIT Total Return Index was up 23.66 percent for the year. The 2010 returns follow a gain of 27.45 percent in 2009. So far in 2010, broader market measures such as the S&P 500 have seen increases in the range of 10 percent.

In an interview with REIT.com, Nordby said his long-term outlook for REITs remains favorable thanks to a combination of solid market fundamentals and an improving macroeconomic environment.

"In the long run, share prices are driven by FFO growth," Nordby said. "REITs are well positioned to grow FFO over the next several years, as steady recovery in employment and retail sales combine with almost no new supply, at the same time as debt costs are expected to remain low."

REIT share prices have benefited from their attractive yields throughout 2010, according to Nordby, and the third quarter was no exception. The FTSE NAREIT All REIT Total Return Index climbed 12.25 percent from the beginning of July to the end of September.

"Third quarter commercial real estate occupancy gains and—for the apartment sector at least—rental rate gains foreshadow income growth for REITs, goosing demand for REIT shares," he said. "Also, remember, REITs are leveraged, so decreases in debt costs and easier financing lead to higher cash flows to equity, and debt costs have fallen sharply for REITs over the past several months."

Despite the industry's recent outperformance, Nordby said institutional investors haven't yet displayed much interest in increasing their REIT exposures. He noted that because REITs are publicly traded stocks, many major institutions tend to lump them in with their general equity allocations, rather than real estate. Nordby said REITs' perceived volatility still was scaring off large capital sources as well.

"This isn't to say that there aren't good reasons to own publicly traded real estate, just that there are significant headwinds amongst institutional investors," Nordby said.