Brad Case

It may be surprising to many investors to learn that the same data they may use to value exchange-traded Equity REITs can also be used as a tactical signal for shifting capital between REITs and non-REIT stocks.

The price-to-NAV spread estimated at the end of 2016 suggests that total returns on exchange-traded Equity REITs would average about 13.6% per year over the next five years. 

The yield spread to Baa corporates as of the end of 2016 was in the bullish part of its historic range—and if a wide variety of estimates of the past relationship between spreads and forward-looking returns continues to hold, that currently bullish spread would suggest relatively bullish future total returns for investors in exchange-traded Equity REITs.

The yield spread to Treasuries as of the end of 2016 was in the bullish part of its historic range—and if a wide variety of estimates of the past relationship between spreads and forward-looking returns continues to hold, that currently bullish spread would suggest relatively bullish future total returns for investors in exchange-traded Equity REITs.

The diversification benefits of exchange-traded Equity REITs relative to the non-REIT parts of the stock market have persisted throughout a long period encompassing an almost unfathomly severe downturn—yet they have almost never been stronger than they were as 2016 came to a close.

While the factors that drive Equity REIT returns are always somewhat different from those driving the returns of non-REIT stocks, the differences between the two equity asset classes—real estate and non-REIT stocks—have rarely been more different than they are as of the start of 2017.

A below-standard year for exchange-traded Equity REITs was still better than their counterparts in the illiquid real estate market, while a stunningly successful year for exchange-traded Mortgage REITs wasn’t all that out of the ordinary.

One of the most important investment metrics is the term structure of correlations between any two assets.  Correlation measures the degree to which the returns for a pair of assets move together.

The bedrock of any investor’s portfolio—no matter how small, no matter how large—is an allocation to the broad U.S. stock market.  To go just the tiniest step further, most investors start with a mix of U.S. stocks and U.S. bonds.  The question is what to add to that basic portfolio.

As of the end of September 2016 the average dividend yield for stock exchange-traded Equity REITs was 3.70%.  That’s extremely low by historical standards: in fact, the average Equity REIT yield has been greater than 3.70% nearly 90% of the time stretching all the way back to the beginning of 1972. 

Investment real estate values increased by +4.1% during July 2016 according to the FTSE NAREIT PureProperty® Index Series, which provides the earliest measurement of changes in the market values of properties held for investment purposes.

The continued fallout from the UK’s vote to exit the European Union has punished investors with exposure not only in that country but in the rest of Europe too.  No assets have been hit harder than British real estate, but investors in the British stock market, European stocks, and European real estate have suffered as well.