08/02/2017 | by
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REIT returns were modestly higher in July, although certain property segments continue to post outsized gains.

The total returns of the FTSE NAREIT All REITs Index rose 1.2 percent in July, while the S&P 500 posted a total return of 2.1 percent. For the first seven months of 2017, total returns of the FTSE NAREIT All REITs Index gained 6.7 percent, while the S&P 500 returned 11.6 percent.

Total returns of the FTSE/NAREIT All Equity REITs Index gained 1.3 percent in July and 6.2 percent through the first seven months of the year. The total return of the FTSE NAREIT Mortgage REIT Index rose 0.4 percent in July and 16.5 percent for the year to July 31.

The yield on the 10-year Treasury note was flat in July. Through July 31, it dropped 0.1 percent for the year.

“Overall, we’re seeing a decent amount of growth, but there’s been no break-out growth from the REIT sector,” said David Rodgers, senior analyst at Robert W. Baird & Co. He pointed out that the more moderate pace of growth “makes sense” following REITs’ outperformance of the last several years.

Meanwhile, Brad Case, NAREIT senior vice president for research and industry information, pointed out that the stock market rally seen this year has been concentrated in stocks that are already expensive relative to their earnings, particularly large-cap growth stocks.

While some REITs are large-cap stocks, “they’re not large relative to the behemoths that dominate that part of the market,” Case explained. He noted that a more accurate assessment of REITs can be made by comparing their performance to that of small-cap value stocks, which historically are most similar to REITs.

Small-cap value stocks, as measured by the Russell 2000 Value Index, gained 0.6 percent during July and 1.2 percent year-to-date, Case noted.

“Investors hold REITs because they want the asset class diversification benefits of real estate, and this year has been a good example of that because REITs have so strongly outperformed the non-REIT stocks that are otherwise most similar to them,” Case said.

Meanwhile, Rodgers stressed that as the real estate cycle becomes more advanced, investors are becoming increasingly selective as to which REIT segments they own. That has led to healthy gains in several REIT property types.

Industrial REITs posted returns of 3.5 percent in July and 15.1 percent for the year to July 31. According to Rodgers, second quarter industrial earnings calls have generally been more bullish compared to the previous quarter.

Returns for data center REITs totaled 4.1 percent in July and 26.6 percent through July 31. Manufactured home REITs recorded returns of 1.2 percent in July and 20.1 percent for the first seven months of the year. Infrastructure REITs also had a solid performance, with return of 2.1 percent and 24.8 percent year-to-date.

Shopping center REIT returns of 7.7 percent led the pack in July, although returns are 11.7 percent lower year-to-date.