Quick Study: REITs Gain in August as Investors Grow Comfortable with Fundamentals

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, offered an analysis of REIT market gains in August.

The total return on the FTSE NAREIT All REITs Index increased 3.4 percent for the month, slightly below the 4.0 percent gain in the S&P 500 Index during the same period. As of the end of August, the FTSE NAREIT All REITs Index was up 19.8 percent, compared to a 9.9 percent gain for the broader market.

“REITs are strongly outperforming… real estate investors have really been rewarded,” Case said.

According to Case, investors are generally more comfortable with the notion that the economic recovery is going to continue, which will increase demand across all types of commercial real estate. At the same time, investors have become aware of how little new construction is occurring nationwide in all property types, he said. Although increases in construction have occurred, it has not been enough to meet the increases in demand, Case noted.

“That suggests that as the economy continues to expand, REIT investors are likely to benefit from continued increases in occupancy levels, in rent growth, and, therefore, in net operating income and their REIT dividends,” he added.

Case observed that REIT investors are in the middle of a bull market that “historically speaking has tended to be very long, closer to 15 years, compared with stock market cycles, which are closer to four years.” REIT investors are likely to continue to see improvements in net operating income and dividends going forward, “and that’s what the market has responded to,” according to Case.

Meanwhile, the strongest performing REITs in August included those in the infrastructure, health care and timber sectors, Case pointed out, which were not so prominent several years ago.

“Investors are clearly becoming more comfortable with those property types as portions of the entire REIT market,” Case said.

Case also highlighted the strong diversification benefits within the REIT market and noted that investors who hold REITs alongside their other stock holdings can enjoy reduced volatility in their portfolio.