REIT Returns Up in March on Encouraging Fundamentals

REIT returns climbed in March and outpaced the broader market as investors remained encouraged by the outlook for fundamentals in the sector, according to analysts.

The FTSE NAREIT All REITs Index had a total return of 1.2 percent in March, while the S&P 500 Index slipped 1.6 percent.  The 10-year Treasury note dropped 0.1 percent in the month.

For the year, the FTSE NAREIT All REITs Index is up 4.1 percent, whereas the S&P 500 is up 1.0 percent.

“Fundamentals are excellent. It seems to be go-go time for raising rents, and demand is well outpacing supply pretty much across all property types,” said Matthew Werner, portfolio manager at Chilton Capital Management LLC.

Alex Goldfarb, senior REIT analyst with Sandler O’Neill + Partners, pointed out that concerns about interest rates, oil prices, global growth and geopolitical developments are likely to keep downward pressure on the 10-year Treasury note going forward. Real estate will continue to stand as an attractive alternative, he added, because it offers a consistent income stream and is easily financeable.

David Rodgers, senior analyst at Robert W. Baird & Co., said REIT performance so far in 2015 has been characterized by a more deliberate investing strategy.

For the last couple of years, REIT market performance has mainly been driven by fund flows into large cap stocks, according to Rodgers.  “This year, we’re seeing a much more balanced performance among small, mid and large cap names,” he said.

Although generalist investors were paying attention to the likely timing of interest rate hikes during March, growth prospects in the REIT sector are “keeping interest levels fairly high,” according to Rodgers.

Werner said short-term performance in the REIT market is still tied to interest rate developments.

“We just need to stay focused as long-term investors… With the current GDP and job growth run-rate, REITs should be in excellent position to grow cash flow and dividends under the consensus scenario,” he observed.

Apartment REITs were among the strongest performing sectors in March, with total returns of 3.8 percent. Returns on regional mall REITs rose 2.3 percent, while returns for office REITs also gained 2.3 percent.