Property markets generally are experiencing rising rents and occupancy rates, reinforced by limited new supply and development. However, in the first half of 2015 REIT returns have not been reflective of the positive property market fundamentals. According to NAREIT’s July 2015 Media Brief, REIT stocks have underperformed the broader stock market during the first six months of the year.
The FTSE NAREIT All REITs Index, which includes 224 REITs with a combined equity market capitalization of $890 billion, fell 5.24 percent in the first half of 2015. The FTSE NAREIT All Equity REITs Index and the FTSE NAREIT Mortgage REITs Index dropped 5.44 percent and 5.09 percent, respectively, in the first half of the year. The total return of the S&P 500 Index climbed 1.23 percent in the same period.
“Stock exchange–traded equity REITs have had trouble in the early part of this year because of concerns among investors of the effect of interest rates on commercial property values,” says Brad Case, senior vice president research and industry information for NAREIT. “And that concern, number one, is probably misplaced to begin with and, number two, certainly has been factored into asset values.”
Analysts also have noted that investors who were using the REIT market as a partial fixed-income proxy are exiting the market as Treasury yields climb higher. The U.S. 10-year Treasury climbed to nearly 2.5 percent in June, up from 1.64 percent at the end of January.
The downturn in the market follows last year’s robust REIT performance. The FTSE NAREIT All REITs Index posted a total return of 27.15 percent in 2014 and the All Equity REIT Index returned 28.03 percent, significantly outperforming the S&P 500 Index, which produced a total return of 13. 69 percent.
Looking at the performance of individual real estate sectors during the first half of 2015, Industrial REITs had the most significant decline, with total returns falling 11.33 percent. Office and retail returns both fell by approximately 7 percent. The top performing sectors during the first half were self-storage and manufactured homes, which both saw strong returns, each with an approximate 3.7 percent gain. Apartments were up 0.82 percent.
“What’s happened in the first half of this year is really something of a buying opportunity in the sense that stock prices of listed equity REITs have been driven down even though there’s nothing that’s really very pessimistic about the market situation,” says Case.