Brad Case

Historically, when REIT dividend yields became high relative to the yields on other income-oriented investments, that has usually been a sign that REITs had become undervalued and were likely to perform strongly over the next several years.

For REIT investors 2017 turned out to be a very normal year—but that was a huge disappointment given the “irrational exuberance” that investors in some other parts of the stock market enjoyed. So how can we develop empirically-based REIT return expectations for 2018?

Concern is growing among some investors that tight labor markets may trigger an increase in price inflation. 

One of the enduring mysteries of reporting on investments is how many people seem to focus on price appreciation OR income, and how few people focus instead on total return

Pricing in the private real estate market has become more inflated, relative to REIT valuations, than at any time since 2007.

The correlation between REITs and the broad stock market has always been relatively low because REIT returns are driven by the real estate market cycle whereas returns for most other equities are driven by the much shorter business cycle.

Whether what you’re looking to purchase is simply the steady income typical of REITs and Treasuries or the broader performance and diversification benefits of the real estate asset class, the “price” for purchasing those investment return attributes through listed equity REITs is especially favorable now.

An investment performance comparison between listed equity REITs and the rest of the U.S. stock market—segmented by sector or by style—highlights the long-term diversification benefits of the listed equity REIT market.

Investments from listed property companies in emerging markets have been especially strong over the past year, according to the FTSE EPRA/NAREIT Global Real Estate Index Series.  Over longer historical periods, however, risk-adjusted returns from listed U.S. equity REITs have outpaced those from listed real estate in both emerging markets and non-U.S. developed markets.

The current bull market for exchange-listed equity REITs has rewarded investors with returns averaging more than 21% per year over the past 8½ years—but by the standards of previous real estate market cycles this one has not even hit its stride yet.

 An increase in interest rates might be cause for concern if it were predicted to come with no accompanying increase in net operating income—but it’s those changes in net operating income, not the interest rates themselves, that should attract the closest attention of investors in any equity asset such as real estate.