November 1, 2006

REITs Keep Plowing Ahead

Searching for Alpha, the monthly index newsletter for November 2006

Real estate investment trusts (REITs) continue their gravity-defying run. After exceeding the return of the S&P 500 index for each of the last six years, REITs have built up a tremendous lead in 2006, and with only two months left to go, are poised to extend their yearly winning streak.

This year started with a bang for the asset class, with REITs advancing by about 12% versus 4.2% for the S&P 500 index in the first quarter. The second quarter saw some slight losses due to a slowdown in U.S. economic growth and an uptick in 10-year yields. But REITs caught a bid in July, and are up over 30% on the year, including a sizzling 6% run in October.

The ability of real estate investment trusts to ride on expanding opportunity sets partly explains their staying power. Back in 1999, their most popular attribute was their yield. In the years that followed, REITs profited first from the housing boom, and now the bull market in non-residential real estate. Recent gains in REITs are more likely due to consolidation and speculation in the real estate industry.

The outlook for REITs is mixed. P/E ratios for REITs are now the same as, or slightly higher than, the S&P 500 index, and their yield premium to Treasuries is a scant 80 basis points. But continued moderate growth and strength in the office and hotels sectors could bolster the asset class into next year.

The Monthly Index Report for November 2006

Index

Oct-06

QTD

YTD

Description
S&P 500 Index*

3.15%

3.15%

10.39%

Large-cap stocks
DJIA*

3.44%

3.44%

12.72%

Large-cap stocks
Nasdaq Comp.*

4.79%

4.79%

7.32%

Large-cap tech stocks
Russell 1000 Growth

3.52%

3.52%

6.59%

Large-cap growth stocks
Russell 1000 Value

3.27%

3.27%

16.89%

Large-cap value stocks
Russell 2000 Growth

6.48%

6.48%

10.96%

Small-cap growth stocks
Russell 2000 Value

5.09%

5.09%

19.02%

Small-cap value stocks
EAFE

3.90%

3.90%

19.39%

Europe, Australasia & Far East Index
Lehman Aggregate

0.66%

0.66%

3.74%

U.S. Government Bonds
Lehman High Yield

1.36%

1.36%

8.80%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

1.58%

1.58% 0.88% Managed Futures
3-month Treasury Bill

3.99%

All returns are estimates as of October 31, 2006. *Return numbers do not include dividends. ** Returns are estimates as of October 30, 2006.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.

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