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REIT Market Snapshot: Yielding to Future Returns

08/03/2010 | By

As temperatures continue to rise this summer, so to do REIT returns, according to NAREIT Vice President of Research and Industry Information Brad Case. The FTSE NAREIT Equity REIT Index posted a 9.52 percent total return for the month of July, compared to 7.01 percent for the S&P 500.

In fact, Case says the strong performance seen in July is merely a glimpse of what REIT investors have been witnessing for much longer periods of time.

"Over the last 10 years, REIT investors have received total returns averaging 9.4 percent per year," Case says. "Whereas investors in the S&P 500 have actually lost money over the last 10 years and even investors in smaller stocks and value-added stocks have not kept up with REIT investors."

However, Case says it is important that investors realize that the strength seen in REIT returns recently is not indicative of the health of the broader commercial real estate market.

"In July we continued to witness a real disconnect with what is happening to REITs and the broad real estate market," Case says. "In fact, the real estate market itself continues to be quite weak. REIT investors are certainly aware of that, but they are really looking forward to the fact that REITs are going to be able to buy good properties at very favorable prices over the next few years."

Case adds that the current dividend yield of REITs is another example of the discount between REITs and the broader real estate market.

"REIT dividend yields are at about 4.6 percent, which by historical REIT standards is very low," Case says. "REIT investors are essentially saying that the lower current dividend yield is based on current earnings, which in the very weak real estate environment right now is not surprising. REITs are looking forward to very strong earnings going forward, so REIT investors are really valuing stock prices according to where they expect the yield to go over the next few years."