Undervaluation of REIT Stocks Continues, Says Nareit’s Case
11/03/2017 | by Sarah Borchersen-Keto

REIT stocks were modestly lower in October despite the sector’s solid fundamentals, according to Brad Case, Nareit senior vice president for research and industry information.

The total returns of the FTSE Nareit All REITs Index dropped 0.2 percent in October, while the S&P 500 posted a total return of 2.3 percent. For the first 10 months of 2017, total returns of the FTSE Nareit All REITs Index gained 6.6 percent, while the S&P 500 returned 17 percent.

The total returns of the FTSE Nareit Mortgage REIT Index dropped 3.1 percent in October, but rose 16.3 percent for the year to Oct. 31.

Case said the performance of REIT stocks is not easily explained.

“It puzzles me because REIT fundamentals are solid; real estate cycle fundamentals are solid. Investors clearly aren’t worried about economic growth because we continue to see growth in specifically the large-cap and growth segments of the broader market,” Case said.

Case said concerns have emerged about the possible overvaluation of the broader market. Against this backdrop, “it’s very clear that REITs are undervalued relative to both the broad stock market and the private side of the real estate market. It does puzzle me that the relative undervaluation has continued,” he noted.

Meanwhile, Case said the performance of retail REITs during October was equally hard to explain, given that the sector has been battered for most of the year. Retail REITs saw their returns drop 4.0 percent during October. Case emphasized that retail REITs tend to own the highest-performing properties in the sector and are not facing the same pressures as other owners of retail real estate.