In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, said that despite a difficult month for all investors in January, REIT investors fared relatively well.
The total returns of the FTSE/NAREIT All REIT Index fell 3.5 percent in January. In the broader market, however, large cap stocks lost 5.0 percent, small cap value stocks lost 6.7 percent, and small cap growth stocks lost nearly 11 percent, Case observed.
“It’s good to have some portfolio diversification when it’s a difficult month for the market as a whole,” Case said.
He noted that economic uncertainty during the last three months has resulted in REIT returns declining by 5 percent, whereas stock market investors saw their holdings decline by 10 percent.
Case added that following a period of two good months in September and October, the stock market has since given away all of its gains. REIT investors, on the other hand, have seen their holdings gain about 8 percent since the end of August.
“It’s important to keep those benefits of diversification in mind, even when you are looking at a month like January that was a tough one,” Case noted.
Market volatility is really a measure of uncertainty about asset values, Case explained. That stems from uncertainty about the course of the macroeconomic expansion.
According to Case, almost every sector in the stock market is giving investors exposure to the business cycle, which is about four years in average duration. REITs, however, offer exposure to an entirely different set of earnings drivers that encompass the real estate market cycle. The real estate market cycle has averaged about 18 years, Case said, “and we’re really only half way into it.”
Case stressed that although investors are responding to uncertainty about macroeconomic conditions, those conditions have more to do with the business cycle and the rest of the stock market than with the U.S. real estate market cycle. He underscored that U.S. REITs, unlike the rest of the stock market, don’t have a lot of exposure to global developments.
Among the best-performing segments of the REIT market in January were data centers, self-storage and free-standing retail, Case noted.