Why Have REITs Been So Strong?
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Despite the recent slump in the real estate economy, publicly traded REITs (real estate investment trusts) have been outperforming dramatically. REITs are also significantly ahead of the stock market, beating year to date returns of 2.3% for the S&P 500 and 5.2% for the Russell 2000 (see Table 1). That’s not much of a surprise, since REITs have surpassed the stock market over nearly any historical period since inception of the FTSE NAREIT U.S. Real Estate Indexes in January 1972.
Table 1: Historical Compound Annual Total Returns of REITs and Leading US Benchmarks (%)
There are three reasons why REIT returns are sustainable and investors should still be optimistic:
- Real estate upturns have been extended: the last one was 16.5 years, and we are only 18 months into the current one. During each of the last two REIT bull markets, returns averaged more than 20% per year.
- Real estate operating fundamentals have hardly ever been weaker than they are now, and there are already initial signs of improvement. Barring a surprise deterioration in the economy earnings can be expected to improve as the economy strengthens.
- REITs are in a superior competitive position against private real estate investors (including those opportunistic and core private equity real estate funds), and are likely to benefit substantially from their continuing problems. The reason being is REITs have access to capital both equity and debt on favorable terms, while private equity funds do not, and they have a long track record of making superior investment decisions with their available capital.
Over the next few years, as funds are forced to sell at the bottom of the market, REITs will be picking up the pieces. Given how many inferior performers there are in the real estate market, taking advantage of them should support REIT earnings growth for years to come. For additional views on this subject, see this recent CNBC web and video coverage.
–Brad Case, Vice President of Research and Industry Information for NAREIT gives insight into the REIT market and why it has been so strong. To learn more about the global REIT marketplace, join FTSE Americas and their panel of notable REIT experts on Tuesday, October 19th.
For more information about the FTSE NAREIT Index Series, go to www.ftse.com or contact FTSE at 1-877-747-FTSE.