Quick Study: REITs Outpace Broader Market in September

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, discussed the recent outperformance of the REIT sector compared with the broader stock market.

The total returns of the FTSE/NAREIT All REIT Index rose 1.9 percent in September, while the S&P 500 Index lost 2.5 percent. Year-to-date, REIT returns are down 4.5 percent, while the S&P 500 Index is down 5.3 percent.

September marked the third month in a row that the REIT market outperformed the broader stock market, Case said. Case said the announcement by the Federal Open Market Committee (FOMC) during September that it would keep interest rates steady likely had a negligible impact on REIT performance.

He added that the more likely cause for REIT gains in September was the recognition among investors that REITs had become undervalued.

Case highlighted some of the current trends in private-public real estate market valuations. According to Case, investors should recognize that the valuation process on the private side of the real estate market results in valuations that are lagging by about a year relative to the true values of the properties.

“What we’ve seen earlier this year is that valuations in the private real estate market have increased very strongly, and that really represents what was happening to the actual market values of those properties last year,” he observed.

Case said he expects that later this year and early into 2016, the private real estate market will experience the same sort of declines that the REIT market experienced in the first half of 2015.

“Is the real estate market overvalued? It’s very possible that the private valuations in real estate had become inflated,” Case said. “It may be that REITs were undervalued, but that has been corrected to some extent in the last three months.”

Meanwhile, Case pointed out that most REIT sectors performed well in September. He attributed the overall gains to greater confidence in the macroeconomic outlook and the FOMC’s management of interest rates.

The FOMC’s expectation that the economy will start to show signs of improvement is being interpreted by investors as “a healthy situation for real estate, especially given the continued suppression of new construction in really all property types nationwide,” Case said.