REIT Rebound Highlights Interest in Undervalued Assets, Case Says

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, said a rebound in REIT returns during December was likely caused by investor interest in undervalued assets.

The FTSE/NAREIT All REIT Index had a total return of 4.2 percent in December following four consecutive months of downturns. The S&P 500 index was up 2.0 percent in December.

“It was very difficult to make the case that REITs were overvalued. Investors started to recognize that and come back into the REIT market,” Case said.

For the entire year, the FTSE/NAREIT All REIT Index posted a total return of 9.3 percent, while the S&P 500 saw a total return of 12 percent. Case pointed out that REIT returns for 2016 were “a little bit low” by historical standards.

Looking at the real estate market more broadly, Case pointed out that “there are lots of signs of slow to moderate, but steady, growth in macroeconomic conditions and steady growth in real estate market conditions.”

“That’s good news for real estate investors going forward,” he said.

Case noted  that REITs still appear to be “very favorably valued” for long-term investors. The Equity REIT dividend yield at the end of 2016 was just less than 4 percent, with about a 1.5 percent spread between Equity REIT dividend yields and yields on 10-year Treasury bills. Case said this is generally a “very optimistic signal” for returns during the next several years.

“REIT investors are quite well-positioned to take advantage of the macroeconomic and real estate market situation going forward,” Case observed.

Meanwhile, Case noted that despite the divergence between property types during 2016, current valuations and real estate market conditions provide a “solid situation to promote growth in property values and dividends going forward, really across all property types.”