Real Estate - JANUARY 12, 2017

The return of REITs

by Loretta Clodfelter

Although U.S. REITs struggled in the fall, they achieved a total return of 8.63 percent in 2016, according to the FTSE NAREIT All Equity REITs Index. The performance was far better than the 2.83 percent the index returned in 2015.

Investors telegraphed concern for the REIT market as interest rates rose in the fall, and the sector had several months of declining total returns. In December, however, U.S. REITs returned 4.46 percent, according to the FTSE NAREIT All Equity REITs Index.

“REITs certainly had a seesaw year in 2016,” says Cedrik Lachance, director of U.S. REIT research at Green Street Advisors. “The performance of individual property subsectors was generally driven by changes to property fundamentals or changes in expectations for fundamentals. For instance, the industrial sector greatly outperformed as the sector benefits enormously from e-commerce, while the self-storage sector fundamentals are decelerating briskly and this showed in lagging total returns.”

The best-performing property sector in 2016 was industrial, with a total return of 30.72 percent. Other standout sectors were single-family homes (26.65 percent), data centers (26.41 percent) and hotels (24.34 percent). Only two property sectors recorded a negative total return in 2016: self-storage (–8.14 percent) and regional malls (–5.20 percent).

“For 2017, we expect operating fundamentals to remain positive in all property sectors as market rents continue to grow at a pace that is at or above inflation in almost all property sectors,” adds Lachance. “The main external event to watch is the likely sweeping changes to the tax code the new administration will seek to pass and how that will impact real estate investments. As for REITs, they screen at the inexpensive end of a fair pricing range, suggesting investors could be well served to maintain their REIT allocation or increase it slightly.”

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