REIT returns fell in November, as gains in long-term interest rates continued to put downward pressure on the sector, market watchers said.
The total returns of the FTSE/NAREIT All REIT Index dropped 2.0 percent in November, while the S&P 500 index gained 3.7 percent. Total returns of the FTSE/NAREIT All Equity Index fell 2.4 percent in November, while total returns of the FTSE NAREIT Mortgage REITs Index gained 1.7 percent.
For the year through Nov. 30, the FTSE/NAREIT All REIT Index climbed 4.9 percent, while the S&P 500 posted a total return of 9.8 percent. The yield on the 10-year Treasury note gained 0.5 percent in November and 0.1 percent in the first 11 months of 2016. Returns for the FTSE/NAREIT All Equity Index climbed 4.0 percent for the year through Nov.30, while returns for the FTSE NAREIT Mortgage REITs Index rose 22.1 percent in the same period.
“The performance in the back half of the month, post-election, has been fairly negative because of the spike in the 10-year [Treasury] yield,” said Jeffrey Langbaum, senior REIT analyst at Bloomberg Intelligence. “For some period of time, REITs are going to trade on the expectation and actual direction of interest rates and the 10-year,” he added.
Alexander Goldfarb, senior REIT analyst at Sandler O’Neill + Partners, L.P., pointed out that the “big move” for the REIT sector occurred between late summer and fall, as 10-year Treasury yields began to rise based on expectations of higher interest rates and inflation.
“Since the election, people are really looking at the pro-growth policies of the Trump administration: lower taxes, less regulatory burden and more balanced economic growth,” Goldfarb said. For REITs, Goldfarb noted that since the election in early November, rising debt costs are being offset by “people mentally penciling in better top-line growth.”
Turning to property sectors, hotel REITs outperformed the rest of the industry in November, posting returns of 13.1 percent. Langbaum said the hotel sector is “probably poised to benefit the most” from a stimulatory economic environment.
Looking ahead, Goldfarb said he expects the New York office market to benefit from a lighter regulatory burden on the financial services industry. Meanwhile, Washington, D.C., could see gains from the prospect of increased defense spending, he said.