REITs have been putting the rest of the stock market to shame, returning 17.8% year to date (through September 10) while the S&P 500 languished at 0.90%. That’s not just a 2010 phenomenon, either. In fact, REITs have outpaced the stock market over just about every conceivable historical period: 12 months, three years, 5, 10, 15, 20, 25, 30, 35, and since inception of the benchmark index for U.S. REITs in January 1972.
Over the last 10 years, REIT returns averaged 10.2% annually while the S&P 500 was stuck at -0.8%. What explains such consistent outperformance?
Publicly traded REITs have a big advantage that most other stocks don’t. REITs own only about one-tenth of the income-producing property in the country, which means that most real estate is in the hands of other investors–especially private equity real estate funds–that, frankly, have proven themselves less capable in terms of their investment decisions or their property management, and probably both.
Good investors buy low, sell high. During the real estate bubble in 2006-2007, REITs sold a net $86 billion of property at peak values. But somebody had to take the losing side of those deals, and largely it was private equity real estate funds, which bought a net $49 billion at the peak.
Now the real estate market is about at its trough, and REITs are the most active buyers–while private equity real estate funds are mostly idle. Why? Because publicly traded REITs have access to capital–both equity and debt–on good terms, while private equity funds don’t.