REIT Continue to Beat S&P 500 in 2016

REIT gains were in line with the broader market in July, but on a year-to-date basis, REITs have far outpaced the S&P 500 Index as investors continue to search for yield, analysts said.

The FTSE/NAREIT All REIT Index had a total return of 3.9 percent in July, while the S&P 500 Index gained 3.7 percent. For the year through the end of July, the total return of the FTSE/NAREIT All REIT Index was 18.1 percent, while the S&P 500 Index posted a total return of 7.7 percent. The yield on the 10-year Treasury note dropped 0.8 percent in the first seven months of 2016.

Analysts commented that Brexit, the United Kingdom’s vote to leave the European Union, caused investors to closely examine their best options for growth.

“In times of uncertainty, U.S. real estate and REITs are going to look that much better because of the cash flows and lack of supply. It’s been what has fueled real estate this whole cycle,” said Alexander Goldfarb, managing director at Sandler O’Neil & Partners.

“REITs are yielding 3 percent or so, with 6 percent to 7 percent earnings growth. That’s pretty compelling,” he added.

Goldfarb pointed out that investors are willing to “pay up” for yield-oriented investments “because the alternative isn’t that attractive, or is a little unnerving.”

Ki Bin Kim, analyst at Sun Trust Robinson Humphrey, Inc., said he expects the current low interest rate environment to be sustained. “Do I expect another leg up to the REIT rally based on another drop in long-term yields? That’s harder to say,” he told REIT.com.

Turning to specific REIT segments, apartment REITs were among the top performers in July, posting returns of 2.5 percent. Through the first seven months of the year, the strongest performance came from free standing retail REITs, where returns totaled 40.4 percent. Data center REIT returns during that period stood at 33.2 percent, and returns for single-family home REITs gained 33 percent.