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 developments in September.
The total return on the FTSE NAREIT All REITs Index decreased 5.6 percent, but Case stressed that September was “a difficult month for all investors…there was no place to hide last month in investing.”
Taking a longer perspective, Case noted that since the beginning of the year, REITs have provided much greater returns than other investments. REIT returns are up more than 13 percent on the year, whereas large cap stocks have gained only 8.3 percent for the year and small cap stocks have actually lost 4.4 percent, Case observed.
“REIT investors weren’t happy about what happened in September but they’ve certainly been happy about what’s been happening over the longer historical periods,” Case said.
Case also discussed whether interest rates played a role in September’s performance. He noted that while some observers point to rates as a factor, “usually REIT returns are positive when interest rates are going up.”
The driver of REIT earnings, Case explained, is not the level or change in interest rates but rather what’s happening to real estate fundamentals such as occupancy levels and rent growth. “I do expect interest rates to rise as the economy strengthens, but there’s no reason that should be bad news for REIT investors,” Case said.
While all REIT sectors lost ground in September, infrastructure REITs had the best performance with a decline of 2.1 percent. Residential REITs were the worst performing sector, with a decline of 7.4 percent in September.
However, “on a longer term basis, investors weren’t sorry to be in either residential or infrastructure REITs,” according to Case. Infrastructure REITs have returned nearly 17 percent in 2014, he noted, while residential REITs have returned more than 20 percent.
Case pointed out that September’s performance fits an established pattern: “During bull markets what we’ve seen historically is about one in every three months is a negative month.”
He added that the current bull market has been going strong for five-and-a-half years, and REIT investors have seen returns averaging nearly 27 percent per year during that time. An average historical real estate bull market has been closer to 15 years, Case said. While investors are likely to see individual down months, “I don’t think there’s any reason to think the party’s over in the real estate market,” he added.