In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, offered an analysis of how the REIT market performed in February following its solid showing the previous month.
“It was a very strong month in February,” Case observed. In general, investors were a little less concerned about the role that the Federal Reserve Board might play in raising interest rates, he said. At the same time, investors showed more confidence in the course of the economic recovery, Case added.
Gains seen across a swath of REIT sectors indicate that “the story is really about consumer confidence about the overall growth of the economy,” according to Case.
The FTSE NAREIT All REIT Index had total returns of nearly 4.7 percent in February.
“That’s essentially identical to small cap stocks in the broader stock market and better than the large cap portion of the broad stock market,” Case noted.
According to Case, the fact that the REIT market and the broader stock market performed in tandem during February is pure coincidence.
“If you look at what happened in January, it was very different. REITs were strongly positive in January, whereas the broad stock market was negative,” he said.
Taking a broader view, Case explained that the correlation between REITs and the broad stock market was low—about 0.55 percent—as of the end of February. “There are very strong diversification benefits that investors can get from investing in REITs alongside their stock market holdings,” Case said.
The correlation between REITs and the small cap value part of the stock market was only about 0.6 percent as of the end of February, Case added, while the correlation between REITs and bonds was about 0.3 percent. In addition to offering diversification, Case emphasized that REITs provide less volatility than small cap value stocks, and non-U.S. stocks.
Turning to specific sectors, Case noted that self-storage REITs performed the strongest in February, but stressed that gains were really seen across most of the REIT market. Retail, residential, office, and lodging and hotel REITs all had gains of between 5 and 6 percent. Industrial REITs were slightly ahead of that range, he added.
The weakest segments of the REIT market during February were timber REITs and health care REITs, Case observed. “Health care REITs have been among the stronger performers over the last several years, so it may be that the rest of the REIT market is simply catching up to where health care REITs have gone before,” Case said.