Quick Study: REITs Post Above-Average Historical Returns in 2014

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, highlighted the REIT market’s outperformance of the broader stock market during 2014. He also suggested that investors pay close attention to supply conditions in 2015.

The FTSE NAREIT All REITs Index had a total return of 27.2 percent for 2014, compared to a return of 13.7 percent for the S&P 500 Index.

“2014 was a very strong year for REIT investors,” said Case, noting that returns on large cap stocks were less than 14 percent for the year and returns on small cap stocks made gains of less than 5 percent.

Case observed that on a historical basis, REITs have provided better returns than the broader market. Average returns for REITs during the last 40 years have been nearly 13 percent per year, Case said.

“REITs have traditionally provided a very strong total return for investors, but 27 percent is not the long-term average,” he noted.

Case also highlighted a key difference between the real estate market cycle and the stock market cycle. The stock market cycle tends to last just a few years, he noted, whereas the real estate cycle can run for an average of 17 to 18 years. Returns during the last cycle averaged more than 14 percent per year.

The current real estate cycle has lasted less than 8 years, Case observed.

“Given that the first few years of that was the liquidity crisis, REIT returns have averaged less than 4 percent per year, so I think we’re still not that far along in this market cycle,” he said.

Looking forward into 2015, Case said he saw no reason why REITs would underperform the broader market. Meanwhile, Case pointed out that REIT investors should shift their attention away from demand conditions and focus instead on the supply outlook, a key determinant of the real estate cycle.

“Although investors may focus on demand and interest rates, what they really need to be focused on most, I think, is construction activity,” Case said.

Turning to sector performance in 2014, Case said constrained supply conditions meant that “no sector performed badly.” Even the weakest performing segment, timber REITs, saw returns of about 8 percent, Case noted. He added that in addition to producing strong returns in 2014, Equity REITs offered a dividend yield of more than 3.5 percent. Mortgage REITs posted a dividend yield of more than 10 percent.