From a small northwestern observatory…

Finance and economics generally focused on real estate

What’s happening to REITs?

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Don’t get me wrong, I’m a great fan of REITs in general (my dissertation was on REIT IPOs). Nonetheless, the great returns of 2009-2012 (which followed the NASTY collapse of 2008) seem to be a thing of the past.

For the half-year ending June 30, REITs are only doing “pretty well”, with a few surprises on a sector-by-sector basis, particularly compared with the 12.6% return in the S&P500 over the same period:

  • Office (7.0%)
    Retail (4.5%)
    Residential (4.6%)
    Diversified (5.8%)
    Health Care (9.4%)
    Lodging/Resorts (10.5%)
    Self Storage (9.0%)
    Timber (5.6%)
    Infrastructure (-4.6%)
  • Note that these returns include dividend yield, which is typically in the 3% – 4% range. This means, for example, that residential and retail returns are almost entirely from dividend income.

    So, what’s going on? Part of the problem is what we’ll call “fulfilled expectations”. In the run-up to 2013, some areas were pretty exciting. Residential, for example, has returned an amazing 284% since the trough of the market about 4 years ago. Retail has returned about 300% over that same period. (Of course, all of these sectors suffered a blood-bath in 2008, so as usual, timing is everything.)

    Over the past couple of years, apartments have been springing up like mushrooms on a warm spring morning. Investors have been very excited for a while, but excitement is beginning to wane. How many new apartments do we need? Retail is sluggish for different reasons — recent reports show double-digit increases in on-line retail, but flat-lines in department store sales. Even Wal-Mart is wondering where their customers are going to come from.

    Lodging/Resorts have some excitement, with new records being set in both volume and prices. However, as I’ve noted elsewhere recently, this may come back to haunt buyers. Health Care, of course, is a play on Obama-care.

    Finally, over the past two months, the entire sector has been shaken by fears of increased interest rates, which impact REITs in two ways. First, the fundamental cost of doing highly-leveraged business goes up. Second, with higher short-term rates, REITs begin to pale as income-producing vehicles.

    Written by johnkilpatrick

    July 15, 2013 at 4:35 pm

    Posted in Uncategorized

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