REIT returns came under pressure during October, although the declines were not as large as those seen across the broader market.
The total returns of the FTSE Nareit All REITs Index fell 2.6 percent in October, while the S&P 500 dropped 6.9 percent. The total returns of the FTSE Nareit Mortgage REIT Index fell 1.8 percent in October, while the yield on the 10-year Treasury note added 0.1 percent.
Steve Manaker, analyst at Compass Point Research & Trading, LLC, described REITs as a “safe haven” during the current period of market volatility.
Jeff Langbaum, REIT analyst for Bloomberg Intelligence, added that some of the macroeconomic headwinds that caused broader market declines last month didn’t filter through to REITs. He added that investors also appear fairly comfortable with increases in the 10-year Treasury yield.
Despite certain pockets of the REIT market experiencing supply concerns, overall REITs appear able to continue to do well given where the economy is heading, Langbaum said.
Manaker noted that to date, third quarter earnings reports have been in line with expectations and show that REITs are “well-positioned” from a capital perspective.
“Our take is that REITs are going to be, at best, market performers [for the next 12 months],” Manaker said. The broader market is going to have better earnings growth than REITs, however, REITs will have less volatility, he added.
“As long as the economy holds up okay, that 5 to 6 percent growth in funds from operations (FFO) for 2019 shouldn’t really change that much,” Manaker said. The big factor, however, will be dispositions. If REITs sell more assets than expected, 2019 earnings growth could be lower. “It’s still a very strong market to sell assets and REITs are taking advantage of that strong market to transform their portfolios,” Manaker said.
Some REIT sectors bucked the downward trend last month. Returns for health care REITs gained 1.8 percent in October, while the retail sector recorded a 0.3 percent gain. Langbaum noted that some of the larger cap health care REITs may be reaching an inflection point in terms of senior housing supply, prompting increased optimism for the sector.