REIT returns were positive in the first half of 2017, but underperformed the broader market. Looking ahead, industry fundamentals remain solid heading into the remainder of the year, according to REIT market watchers.
The total returns of the FTSE NAREIT All REITs Index rose 2 percent in June, while the S&P 500 posted a total return of 0.6 percent. For the first six months of 2017, total returns of the FTSE NAREIT All REITs Index gained 5.4 percent, while the S&P 500 returned 9.3 percent.
Total returns of the FTSE/NAREIT All Equity REITs Index gained 2 percent in June and 4.9 percent through the first six months of the year. The total return of the FTSE NAREIT Mortgage REIT Index rose 2.5 percent in June and 16 percent for the year to June 30.
The yield on the 10-year Treasury note rose 0.1 percent in June. Through June 30, it dropped 0.1 percent for the year.
Brad Case, NAREIT’s senior vice president for research and industry information, noted that during the first half of the year, investors sought out more speculative investments. As a result, value-oriented investments—including REITs—underperformed, he said. He noted that REITs did provide better returns than value-oriented non-REIT stocks.
“REITs continue to provide very attractive valuations with both yield spreads and price-to-net asset value (NAV) spreads firmly in the bullish parts of their historical ranges,” Case stressed.
At current pricing, REITs are looking attractive relative to equities and bonds, according to Matt Werner, portfolio manager at Chilton Capital Management. “We feel pretty good about the back half of the year,” he said. Werner noted that REITs are “right on track” to produce total returns in the mid-to-high single digits.
If historical relationships continue to hold, Case observed, then current valuation metrics suggest that REIT investors may see annual returns in the low-to-mid double-digit ranges over the next few years. REITs may outperform non-REIT stocks by five to seven percentage points per year on average, he added.
Brad Schwer, an equity analyst for Morningstar Research Services, LLC, noted that the REIT market’s underlying performance has remained healthy overall. He pointed out that REITs have been focused on repositioning and strengthening their portfolios, deleveraging and recycling capital.
“Most portfolios are characterized by historically high levels of occupancy and durable balance sheets,” Schwer said.
Werner acknowledged that there has been an absence of volatility in REIT performance during the last few months, excluding the retail segment.
Strong First Half for Infrastructure and Data Center REITs
Infrastructure and data center REITs were among the top-performing sectors during the first half of the year. Returns for infrastructure REITs stood at 22 percent for the year to June 30, while data center REIT returns also rose 22 percent in the same period.
Returns for manufactured home REITs climbed 18.7 percent in the year to June 30, and industrial REIT returns gained 11.2 percent.