U.S. REITs Outpace S&P 500 in First Half

REITs outperformed the broader market in June and the first half of the year, as sector fundamentals and capital markets remained healthy during a period of global uncertainty, analysts said.

The FTSE/NAREIT All REIT Index had a total return of 6.7 percent in June, while the S&P 500 Index gained 0.3 percent.

For the first six months of the year, the FTSE/NAREIT All REIT Index had a total return of 13.7 percent, while the S&P 500 Index gained 3.8 percent. The yield on the 10-year Treasury note during that same period fell 0.8 percent.

“REITs have done really well relative to the broader market,” said David Rodgers, senior real estate research analyst at Robert W. Baird & Co. Inc.

Rich Moore, managing director at RBC Capital Markets, noted that “in general, the broad fundamentals for the real estate sector look pretty sound… We don’t see any material weaknesses developing broadly.”

Rodgers underscored that a “flight to yield” has benefitted REITs. “U.S. real estate offers a pretty attractive yield comparison relative not only to the 10-year Treasury, but to what we see around the world,” Rodgers noted.

At the same time, Rodgers pointed to an upsurge of interest in REITs from generalist investors ahead of the elevation of real estate to a new headline sector under the Global Industry Classification Standard (GICS).

Moore said he has also noticed increased investor interest in REITs lately. “When GICS really hits on Sept. 1, I think you’re going to see a lot more investors who hadn’t really thought about it figuring they’re going to have to start thinking about it,” he said.

While Rodgers sees many factors currently working in REITs’ favor, he stressed that the sharp increase in REIT share prices this year is “something more people will begin to struggle with.”

Strong Sector Performances

Turning to specific REIT segments, data center REIT returns for the year were 37.8 percent, returns for free-standing net lease retail were 34.5 percent, and returns for single-family home REITs were 25 percent. Returns for industrial REITs were 22.9 percent.

Rodgers pointed out that part of the reason why industrial and data center REITs have performed so well is due to the impact of online retailer Amazon.com on both cloud storage and same-day delivery. This is a “story” that investors can understand, he said. “Story stocks have worked the best when you look at the early part of 2016,” he said.