REITs Outperform Broader Market in Solid Start to 2015

REITs started 2015 on solid ground, as continued low interest rates and promising fundamentals helped the sector outperform the broader market in January.

The FTSE NAREIT All REITs Index had a total return of 5.6 percent last month, while the return on the S&P 500 Index fell 3.0 percent.

Anthony Paolone, senior analyst at JP Morgan, noted that the broader market was impacted by jitters concerning oil prices, the dollar and Europe’s economy. Meanwhile, the yield on the 10-year Treasury note fell 0.5 percent in January.

“All of those things played well for REIT stocks. You saw the group take another leg up very rapidly right out of the gate,” Paolone said.

Paul Adornato, managing director with BMO Capital Markets, said the REIT market was boosted at the start of the year by further assurances that the Federal Reserve would not raise interest rates until later in the year: “That, coupled with a very strong economy, went a long way to bolster the outlook for REITs.”

“From an interest rate perspective, REITs became more attractive, and from a fundamental perspective, the growth in the underlying economy signaled that there would be solid demand for real estate. This was the combination that really powered REITs in January,” Adornato said.

While volatility is to be expected going forward, “we think the fundamentals of the group look good,” according to Paolone.

“To the extent that you’re going to continue to have very low interest rates and some of these broader macro factors, then REITs should have a good home,” he said.

Adornato observed that given the current level of REIT valuations, he doesn’t expect gains in the months ahead to continue at the current rate.  “While we do expect an improving economy to bolster earnings, I don’t know if that growth in earnings is enough to sustain the rate of growth seen in January,” he said.

Almost all REIT sectors performed well in January. Gains were led by the self-storage sector, which rose 9.6 percent. Health care REITs trailed slightly, up 9.3 percent.