REIT share prices rose sharply in January, delivering to investors a total return of 11.6 percent (PDF), according to the FTSE Nareit All Equity REITs Index. REITs outpaced the broader stock market, as the S&P 500 posted a total return of 8.0 percent. In fact, January was the strongest monthly performance for REITs since October 2011.
Gains were widespread across the different REIT property types, with every property sector posting gains of 6 percent or more for the month. Timber REITs led the way with an 18.3 percent total return, followed by Industrial REITs (15.3 percent) and Office REITs (14.5 percent).
The fundamentals for REITs and commercial real estate are robust (see a recent market commentary, Demand for Commercial Real Estate Shows No Signs of Slowing). Financial markets had been quite volatile towards the end of last year, as concerns about the durability of the economy weighed on share prices of REITs as well as the broader stock market. Recent news on the overall economy, including the 304,000 rise in payroll employment last month, has helped dispel some of these fears.
These recent results confirm the wisdom of holding a diversified portfolio of equity investments, including REITs, and focusing more on long-term performance than short-term market moves. For example, REITs underperformed broader equity markets in the early months of last year due to concerns about rising interest rates and a possible downturn in real estate markets. But the strong fundamentals for REITs have led to a rebound in valuations, and REITs have delivered a 10.2 percent total return over the past 12 months, while the S&P 500 is in negative territory.