March 7, 2013

Surprise! REITS Underperform Broader Market

Years of outperformance in the wake of the economic crisis may be over

Here’s something we haven’t heard in quite a while—U.S. REIT returns slightly underperformed the broader equity market in the first two months of the year. Despite a plague of problems in residential real estate since the economic crisis of 2008, commercial property stayed strong, leading to significant REIT outperformance in the years since. That may now be turning.

NAREIT’s monthly report does note, however, that the space still significantly outperformed the broader market for the 12 months ended Feb. 28.

On a total return basis, the FTSE NAREIT All REITs Index gained 1.29% in February and the FTSE NAREIT All Equity REITs Index gained 1.24%, while the S&P 500 was up 1.36%.

Year to date through February, the FTSE NAREIT All REITs Index gained 5.63% and the FTSE NAREIT All Equity REITs Index gained 4.94%, while the S&P 500 was up 6.61%.

For the 12 months ended February 28, the FTSE NAREIT All REITs Index was up 20.00% and the FTSE NAREIT All Equity REITs Index was up 19.19%, compared to the S&P 500’s gain of 13.46%. All sectors of the U.S. REIT market except residential delivered gains for the first two months of 2013, and all sectors except residential and diversified provided double-digit returns for the 12 months ended February 28.

Year to date through February, mortgage REITs outperformed the industry with an 11.69% total return, led by commercial financing REITs’ 20.66% return.

Among other market sectors in the first two months, health care was up 9.59%; timber was up 7.89%; industrial was up 7.86% and lodging/resorts was up 7.07%.

For the 12 months ended Feb. 28, timber was up 37.31%; health care was up 31.59%;  infrastructure gained 25.61%; mortgage REITs were up 23.32% led by the commercial financing segment, up 55.63%; and retail was up 22.70%. REITs continued to deliver strong dividends in February.

At February 28, the dividend yield of the FTSE NAREIT All REITs Index was 4.21%, and the dividend yield of the FTSE NAREIT All Equity REITs Index was 3.41%. The dividend yield of the FTSE NAREIT Mortgage REITs Index was 11.49%, with home financing REITs yielding 12.57%. The S&P 500’s dividend yield was 2.21%.

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Read U.S. Real Estate Looking Up but Emerging Markets Rising Even Higher: Cohen & Steers on AdvisorOne.

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