From the August 2014 issue of Research Magazine • Subscribe!

REIT Pullback Ahead?

Has the sizzling hot performance of REITs gotten too far ahead of itself?

After posting consecutive yearly losses of 16.40% in 2007 and 36.94% in 2008, U.S. REITs have recorded five straight yearly gains. Will there be a sixth?

The Vanguard REIT ETF (VNQ) has already jumped 18% through the first half of 2014 and is one of the top performing industry sectors outside of the S&P 500. That performance tops broader benchmarks like the Dow Jones Total Stock Market Index.

REITs, also known as real-estate investment trusts, have been a favorite among income investors because 90% of their taxable income must be distributed to shareholders via dividends. The REIT marketplace includes the development and rental of apartments, office, healthcare and industrial properties.

Green Street Advisors, a real estate research firm, estimates REITs are trading at 18 times adjusted funds from operations compared to an average of 15 over the past two decades.

Downward revisions in first quarter GDP means the broader economy is still soft and that higher interest rates won't likely happen until the economy picks up momentum. And even with modestly higher rates, REITs might still perform well because wage growth and inflation would lift rental property incomes. Residential REITs (REZ) have climbed 20.57% year-to-date while office/industrial REITs (FNIO) are up 16.36% and mortgage REITs (MBB) are ahead by 16.77%.

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