This article is republished with permission from REITCafe.
Real estate investment trusts (REITs) have emerged as a stand-alone sector of the Global Industry Classification Standards (GICs) in September. But the sector posted a second consecutive month of negative total returns, causing investors to worry about interest rates and whether REITs and their underlying real estate are overvalued. The FTSE NAREIT All REIT Index declined 1.41 percent for the month. Despite the sector’s pullback during the past two months, year-to-date total REIT returns of 12.57 percent are well ahead of broader indices. However, with the sector off to a weak fourth-quarter start, will REITs continue to outperform?
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News about interest rates significantly affects REITs, and the Federal Reserve’s decision not to raise interest rates in September drew a positive reaction from the market. However, more Fed officials are disagreeing with the decision not to raise rates. As a result, a December rate hike—coming after the November elections—seems increasingly likely. By waiting until December, the Fed maintains the status quo in order not to affect the economy and potentially influence the election.
The FTSE NAREIT All REIT total return has risen steadily since 2008, and investors are becoming more cautious as they wonder how long the cycle will last. New York City and other top-tier markets that investors watch closely have been making headlines due to market softening. While all markets are not in a similar situation, the headlines are contributing to concern about future REIT performance.
Freestanding retail REITs were the stand-out sector in September with a 1.94 percent return, and a 34.45 percent year-to-date return. Specialty REITs posted a 1.75 percent return during September. After lagging during most of the year, apartment REITs pushed forward in September with a 1.43 percent total return that made them one of the best-performing REIT sectors for the month. Fueled by e-commerce, industrial REITs also continued to move ahead during September with a 0.40 percent monthly total return.
On the other hand, lodging, regional malls, shopping centers, and office REITs posted substantial declines during September.
Property market fundamentals are currently healthy for the majority of property types in most areas, but September REIT performance reflects investors’ worries about rising interest rates and whether the cycle is overshooting.
* 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 10/7/2016.
