4/4/2016 | By Brad Case
Property values nationwide increased 5.6 percent in March as measured by the FTSE NAREIT PureProperty Index Series. The strong recovery in March more than made up for a weak January and tepid February, sending property values up by 3.3 percent during the first quarter of 2016. Income added another percentage point, so total returns on property investments averaged 4.3 percent in 2016Q1.
Total returns on shares of stock in equity REITs were quite a bit higher, averaging 6.0 percent during the first quarter according to the FTSE NAREIT Equity REIT Index. It’s important to keep in mind that equity returns—that is, returns on stock ownership—are typically greater than property returns because most REITs use leverage. In other words, when you invest in REIT stocks you’re getting the full returns of property ownership but you’re putting up only something like 65 cents for every dollar of property you own, because the REIT is borrowing the difference.
Launched last year, the PureProperty Index Series provides a daily measure of U.S. real estate price and total returns at the level of both property (unlevered) and equity investments. The index series infers changes in the values of apartment, health care, hotel, industrial, office, and retail properties owned by stock exchange-listed U.S. Equity REITs by observing changes in stock prices and correcting for the effect of each REIT’s capital structure.
The PureProperty Index Series showed that property appreciation was slightly stronger during March in the East and West regions, at 5.9 percent each, than in the South (5.4 percent) or the Midwest (4.6 percent). Having posted the strongest gains during both January and February, however, properties in the South region enjoyed the strongest property appreciation nationwide during the first quarter of the year at 6.1 percent, well ahead of the Midwest (2.5 percent), the East (2.1 percent), and the West (2.0 percent).
The PureProperty Index Series makes it possible to evaluate relative performance of property segments defined by region, property type, or both. For example, apartment properties in the East had stronger implied performance during March than apartments in any other region, while office properties appreciated more strongly in the South than in any other region. The only price declines recorded by the PureProperty Index Series for 2016Q1 were for office holdings in the Midwest region, which declined by 0.5 percent while also generating income that produced positive total returns averaging 0.6 percent.