REITs Outperform in 2015

In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, noted that although 2015 wasn’t the strongest year for REIT returns, stock exchange-listed equity REITs still outperformed most other asset classes.

Case described December as a “microcosm” of the entire year. Total returns of the FTSE/NAREIT All Equity REIT Index gained 1.3 percent in the month, while the S&P 500 Index dropped 1.6 percent.  For the year as a whole, total returns of the FTSE/NAREIT All Equity REIT Index rose 2.8 percent; the S&P 500 Index added 1.4 percent during the same period.

Overall, “you were better off if you were invested in REITs,” Case said.

Self-storage, apartment and manufactured housing REITs were among the outperformers of 2015. Returns in the self-storage sector exceeded 40 percent in 2015. Case emphasized the growing professionalization of the business, a factor he believes explains much of the long-term growth in self-storage.

The same trend is prevalent in manufactured housing, Case said. Manufactured housing REITs, which delivered total returns of more than 25 percent, are offering a “professional operation that is really meeting the needs of its target demographic audience,” Case said. This, in turn, produces strong operational returns: “Investors are recognizing that and seeing very strong financial returns,” Case said.

As a whole, residential REITs gained more than 17 percent in 2015.

Case also commented on the impact of the Federal Reserve’s decision in December to begin raising its target interest rate. Concerns about a rate increase dominated much of investment decision-making in 2015, according to Case.

“To the extent that investors had been concerned about the effect of the impact of an increase in interest rates on REIT returns compared with returns on other equities, such concerns certainly weren’t borne out during December,” Case observed.

Looking ahead, additional increases in the Fed’s target policy rates and increases in market interest rates should be expected, Case said. However, “I think investors have learned by now that it’s not necessarily a bad thing because rising rates often are a response to improvements in the macroeconomic situation, which are certainly good things for REIT investors,” he added.

At the same time, Case believes investors are getting a better sense of REITs’ capitalization structures.

“The truth is that REITs have brought down their use of leverage significantly. They are not as sensitive to rate increases. Most of their debt is fixed-rate, and holding that on their balance sheet as rates go up is a good thing,” Case said.