REITs Outpace Broader Market in January

REITs lost ground in January as global macroeconomic concerns exerted downward pressure on the sector, but they still outperformed the broader equity market.

The total returns of the FTSE/NAREIT All REIT Index fell 3.5 percent in January, while the S&P 500 Index lost 5.0 percent.

"Even though REITs were clearly impacted by everything that was going on in the broader market, they outperformed on a relative basis,” said Jeff Langbaum, senior REIT analyst at Bloomberg Intelligence.

Stephen Manaker, senior REIT analyst at Oppenheimer, said he expects REITs to continue to outperform the broader market because real estate is “relatively attractive in a land with very little inflation.”

Ki Bin Kim, analyst at Sun Trust Robinson Humphrey, Inc., said his firm is taking a cautious stance on the overall REIT sector, “but REITs are in a decent position compared to the broader market.”

Kim said his confidence in REITs is based on their low leverage levels, stable cash flows, and the fact that several high quality REITs are trading at a discount of 15 percent or more to their net asset values.

Meanwhile, Langbaum said the focus of the market has shifted from trying to determine the timing of an interest rate move to understanding the impact of global forces on the economy. “It certainly feels like we’re in the middle of a very volatile environment,” he said.

Returns for shopping center REITs rose 3.0 percent in January, returns in the self-storage sector gained 2.7 percent, and returns for data center REITs gained 3.8 percent.

The retail segment was slightly higher in January, Langbaum said, which was less about fundamentals and more about mergers and acquisitions activity.

According to Kim, the REIT market has seen a “pretty significant” flight to safety during the last two months. Manaker added that the combination of growth and value make defensive REIT stocks attractive, “almost irrespective of the broader environment.”