REITs Continue to Outpace Broader Market

3/4/2016 | By Sarah Borchersen-Keto

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, pointed out that while REIT returns dropped modestly in February, the sector outperformed the broader market on a year-to-date basis.

The total returns of the FTSE/NAREIT All REIT Index fell 0.3 percent in February, while the S&P 500 Index lost 0.1 percent. For the year to March 3, the total returns of the FTSE/NAREIT All REIT Index dropped 0.1 percent, while the S&P 500 Index fell 2.1 percent.

“This is the kind of month where you don’t feel great, but it’s not a really bad month. It certainly helps to remind us of the importance of diversification because over the long term the REIT market and the rest of the stock market really do behave differently,” Case said.

Turning to REIT market trends in 2016, Case said he is seeing a growing awareness that assets are valued more highly in the private part of the real estate market than they are in the REIT sector.

“That’s curious,” Case observed. He explained that when information is released that impacts property prices, it shows up accurately in the REIT market. Values in the private market, however, are measured by appraisals or by infrequent transactions. As a result, it is much easier for valuations in the private market to become misaligned, Case stated. During the course of 2016, that tendency toward misvaluation may become evident as investment managers in the private part of the market look to purchase REIT-owned assets.

Meanwhile, the lodging sector was the REIT industry’s outperformer in February. Lodging REIT returns gained more than 7 percent. Case pointed out that after a long period of underperformance, “it may be that investors are seeing a way forward for the lodging sector that makes them much more optimistic.”

Returns in the manufactured homes segment were up more than 4 percent in February. Case stressed that manufactured homes have been a top performer for at least the last decade, reflecting the increasing professionalization of the industry.