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 has performed so far in 2014.
Case said the year is off to a “very strong start,” noting that the FTSE NAREIT All REIT Index gained more than 3.3 percent in January. Mortgage REITs, as measured by the FTSE NAREIT Mortgage REITs Index, were up almost 6 percent last month, Case added. At the same time, Case pointed out that the broader stock market, as well small cap value stocks, have both seen prices declining during this period.
Case explained that the performance of the REIT market in the last nine months refutes the argument that REITs have lost some of their diversification benefits relative to the broader stock market. REIT volatility is at a similar level to before the liquidity crisis, “so REIT risk-adjusted performance is very much the way we’ve seen it on a long-term basis,” Case said.
“The REIT market really does enable investors to get strong risk-adjusted returns and also bring down the volatility of their overall portfolio by taking advantage of those low correlations” between REIT returns and the broader stock market, according to Case.
Meanwhile, Case said investors appear to be focused more broadly on the macroeconomic situation at this point, and not simply on interest rates: “I think that’s a very healthy development.”
Case said investors don’t appear to be concerned about the impact of higher interest rates on REIT returns.
“Generally, interest rates are rising because the macro economy is doing better,” he said. “That is good news for real estate, and that tends to drive REIT stock prices up.”
Turning to individual sectors, Case reported that the strongest performers so far this year are the health care and multifamily sectors. He observed that these were two of the weakest sectors last year.
“I think investors are looking for the pieces of the REIT market where they are most likely to find value on a long-term basis, and they are doing it by finding segments that underperformed last year,” Case remarked.