In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, offered an analysis of the REIT market’s performance in November.
Case explained that November was a “very difficult” month for REIT investors, who gave back all of the gains they had made the previous month. The total returns of the FTSE/NAREIT All REIT Index slipped just more than 4 percent during November, whereas the S&P 500 gained around 3 percent.
Looking more broadly, Case remarked that after performing a better than the broader market in the first few months of the year, REITs are now only up 2.4 percent for the year as a whole. Since May 21, the high point of the year for REITs, the sector has fallen 11 percent, Case observed.
The weak performance for REIT stocks has been set against a broader market that “has continued to just roar,” according to Case.
“That’s not a surprise,” Case said. “If you look at historical data, generally speaking, the REIT market and the broad stock market don’t move very closely together”. The stock market is now catching up with the recovery that REITs made in the last several years, according to Case.
Meanwhile, Case pointed out that market behavior in November was largely out of step with trends seen the rest of the year for REITs. The health care and self-storage sectors were most severely hit in November, but over the past year, they have been, respectively, one of the weakest performing sectors and one of the strongest performing sectors, Case remarked.
A similar situation occurred with November’s best performing sectors, regional malls and lodging, Case said. Regional malls have been among the weakest sectors during the year, whereas lodging has been the strongest sector, Case noted. “It’s very difficult for me to come up with a story that makes sense of how the market has treated the different parts of the real estate market this year,” he said.
Meanwhile, Case argued that it is difficult to make the case that REITs are overvalued.
“Regardless of whether you value REITs by looking at the values of their properties or whether you’re valuing them according to their cash flows, their funds from operations and other measures of earnings, what we’ve seen is a loss of 14 percent in the REIT market since May 21,” Case stated.
Looking ahead, Case said he expects to strong support for continued REIT stock price growth over the next few years, buoyed by steady economic growth.