In the latest edition of Quick Study, Brad Case, NAREIT’s senior vice president for research and industry information, offered an analysis of how the REIT market performed in July after a strong showing in the first half.
The total return on the FTSE NAREIT All REITs Index dipped 0.2 percent in July, although the decline was smaller than the 1.4 percent fall in the S&P 500 Index. For the year through July 31, the FTSE NAREIT All REITs Index had a total return of 15.9 percent, compared with a 5.7 percent gain by the S&P 500.
Case observed that in July, investors were concerned about the state of the macro economy and whether the Federal Reserve “might get ahead of the macroeconomic growth picture in allowing interest rates to rise.”
Case also noted that part of the reason that REITs have outperformed the broader market so far this year is because of their underperformance in 2013.
Meanwhile, Case pointed out that infrastructure REITs were up nearly 3 percent in July, while residential REITs were up more than 2.4 percent. “Investors are responding to information about construction patterns and growth in demand. If you look at the residential REIT market, you are seeing both of those at play,” he noted.
Data released in July showed an increase in the formation of new renter households, Case said. “We do expect that to continue because the number of new households has been well below average for the last eight years,” he explained.
Investors regard the information as positive for the future of residential REIT earnings, according to Case. He added that the residential sector has been the strongest performer during 2014 to date, with gains of more than 26 percent.
Residential REITs have also been supported by the fact that residential construction has been lower, Case said. Indeed, the weakest performance during July came from timber REITs.
Looking ahead, Case said REIT investors will be watching for news that points to continued macroeconomic growth.
“If interest rates go up because growth is quickening, then that’s good for real estate investors because it means there’s greater demand for real estate space,” Case said. “I do expect the macroeconomic situation to improve.”