REITs made modest gains in January, as investors continued to size up potential changes to the macroeconomic environment, market watchers said.
The FTSE/NAREIT All REIT Index had a total return of 0.2 percent in January, while the S&P 500 index return was 1.9 percent. Total returns of the FTSE/NAREIT All Equity REIT Index were 0.2 percent in January. The FTSE NAREIT Mortgage REITs Index produced a total return of 1.6 percent. The yield on the 10-year Treasury note was flat in January.
Michael Lewis, director of REIT equity research at SunTrust Robinson Humphrey, said investors are eager to learn more about a number of policy issues under the new Trump administration, including possible changes to tax policy and financial services regulation and spending on infrastructure and defense.
Brad Case, senior vice president for research and industry information at NAREIT, described January as a “moderately positive” month in which investors focused on growth stocks and non-U.S. stocks. REITs “were not the hot part of the market,” he said.
Case agreed that investors are weighing what the leadership change in Washington, D.C. means for the macroeconomic outlook. “Investors seem to be optimistic that it will increase earnings throughout the economy,” Case said.
Meanwhile, Lewis commented that interest rates “have almost taken a bit of a back seat” to supply-and-demand issues and questions about the economic outlook.
“That’s probably right because in the end, the bigger driver is the fundamentals,” Lewis said.
The current interest rate environment has created a positive situation for REITs, according to Case. He noted that the average dividend yield for Equity REITs at the end of January was 3.95 percent, while average dividend yields for Mortgage REITs were greater than 10 percent.
Case stressed that current REIT yield spreads with U.S. Treasuries are “in a very bullish part of the range.” He said that suggests returns in the next several years could be “well into the double-digit range.”
Turning to particular property segments, Case noted that timber REITs were the strongest performers during January with total returns of 3.7 percent. Although industrial REITs lost ground in January, with returns falling 6.5 percent, Case pointed out that they’ve still outperformed the broad stock market over one-year and three-year time periods.