REITs gained ground in September and outpaced the broader market, as fundamentals in the sector continued to hold firm, market watchers said.
The total returns of the FTSE/NAREIT All REIT Index rose 1.9 percent in September, while the S&P 500 Index lost 2.5 percent. The yield on the 10-year Treasury note was 0.1 percent lower for the month. Through the end of September, REIT total returns were down 4.5 percent, while the S&P 500 Index was down 5.3 percent.
Rich Moore, managing director at RBC Capital Markets, said that although the sector continues to be buffeted by macroeconomic forces, underlying conditions are favorable. He noted that in the second quarter, 72 percent of REITs raised their earnings guidance, “which is an unusually high number.”
“The fundamentals for real estate remain extremely strong, and maybe even a little stronger than what we saw at the beginning of the year,” Moore said.
Moore noted that fundamentals are being supported by muted levels of new supply and robust new demand.
Meanwhile, Paul Morgan, managing director at Canaccord Genuity Inc., said generalist investors are looking at the REIT sector as attractively valued. “When you look at fundamentals, core asset values are strong, rent growth is solid, and supply risks are isolated to certain markets and subsectors,” Morgan said.
The sell-off in REITs since January has created a “dislocation relative to the net asset values of the companies,” Morgan noted. “I think more investors are understanding that and are comfortable that, should rates rise at a gradual pace, that the values will be sustained.”
Going forward, monetary policy remains the major story for REITs, according to Morgan. “Even though there is a lot more going on in the REIT market that is good these days, interest rates are front and center in everyone’s mind,” he said.
Self Storage REITs Lead the Way
Among the top-performing REIT sectors in September, self storage REITs rose 6.2 percent, residential REITs gained 5.4 percent, and industrial/office REITs rose 3.8 percent.
“Self storage just keeps doing well. A lot of it has to do with the fact that it’s a fragmented market, so the big guys are continuing to take share from the little guys and are even buying the little guys,” Moore said. The smaller players are also finding it hard to match the Internet presence of the larger self-storage REITs, he added.