REITs Dip in August as Broader Markets Slip

REITs lost ground in August, as market watchers said concerns about the Chinese economy and interest rates weighed heavily across the globe.

The total returns of the FTSE/NAREIT All REIT Index fell 5.7 percent in August, while the S&P 500 Index lost 6.0 percent. The yield on the 10-year Treasury note was flat for the month.

“The baby is being thrown out with the bath water. No sector seems to be immune,” says Daniel Donlan, managing director at Ladenburg Thalmann & Co., Inc.

Donlan said he expects market volatility to moderate once the Federal Reserve makes a clear decision on interest rates: “We need to have some certainty as to what they are going to do. People are just trying to position themselves ahead of the next meeting.”

David Rodgers, senior analyst at Robert W. Baird & Co., said an additional factor weighing on REITs is the deterioration in U.S. credit markets. Credit spreads on unsecured triple-B rated REIT bonds have widened every month this year, according to Rodgers. “When spreads are widening, REITs underperform,” Rodgers noted.

Despite their lackluster performance, Donlan said REITs look particularly attractive when comparing their yields with those of 10-year Treasuries. Donlan commented that he expects REIT fundamentals to remain positive. “There’s enough demand out there for space across most sectors to continue to push rents and occupancy,” he said.

Matt Werner, portfolio manager at Chilton Capital Management, said REIT prices do not reflect solid market fundamental measures, such as job growth, growth in same-store net operating income and low capitalization rates. Rodgers shared Werner’s position on fundamentals.

“From an underlying U.S. property fundamental standpoint, we still feel pretty good, but there are some of these macro concerns that are definitely weighing on the REITs,” Rodgers said. Additionally, Rodgers said he expects such concerns to remain until there’s greater evidence of macroeconomic improvement, particularly with regard to the health of the credit market.

Werner added that a review of REIT returns during the past 10 years shows much less volatility than that of the S&P 500 Index, and that current REIT prices are not justified. “Real estate is the most transparent and predictable asset class. What I’m seeing is a sale on REITs,” rather than a fundamental re-pricing, he said.