This article is republished with permission from REITCafe.
As the end of the calendar year nears, concerns about rising interest rates are putting the squeeze on the performance of real estate investment trusts (REITs). October share prices were lower month-over-month, and all sectors posted lower returns, except for infrastructure REITs which reported 18.3 percent in total returns.
Despite the decline in prices and performance, REIT returns continue to surpass the S&P 500. At the end of October, the S&P 500 total return came in at 5.9 percent, while the total return of the FTSE/NAREIT All REIT Index was 7.1 percent. This marks ten consecutive months that REITs have posted returns higher than the overall S&P.
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Two of the better-performing REIT sectors are industrial and single-family residential. Industrial REITs logged 26.7 percent in total returns for the year through October, and single-family residential REITs followed closely at 26.6 percent. Data center REITs also closed the month with high returns at 22.2 percent.
In August, the Vanguard REIT Index Fund and iShares U.S. Real Estate–ETF each posted year-to-date gains of 18 percent. According to Seeking Alpha, declining U.S. bond yields were the driving factor. With bond yields currently back on the rise, the average year-to-date gain has descended to about 5 percent.
Historically, the REIT universe has not proved strongly correlated to interest rates. However, the correlation between REIT trading and the ten-year Treasury reflected a steep jump over the past month. Seeking Alpha reports, “REITs are trading almost entirely on interest rate moves.” October’s prices and returns are a short-term impact of interest rate concerns, and may also reflect deceleration to more sustainable numbers.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 10/28/2016.
