Brad Case

Property values nationwide increased 5.6 percent in March as measured by the FTSE NAREIT PureProperty Index Series.  The strong recovery in March more than made up for a weak January and tepid February, sending property values up by 3.3 percent during the first quarter of 2016. 

Investment real estate values grew by +0.44% percent during February 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. 

Anybody could be forgiven for having the impression that 2015 was a bad year for REIT investors.  It was full of headlines about the impending increase in interest rates, and equally full of speculation that the Fed’s action would spell trouble for real estate. But REITs—especially the market-dominating equity REITs—outperformed during 2015.  Does that surprise you?  It shouldn’t:

The 3rd quarter ended with property values in the U.S. down 7.9% since the end of 2014, with declines of 8.2% during 2015Q2 and 1.9% during 2015Q3 following the gain of 2.2% posted in 2015Q1, according to the FTSE NAREIT PureProperty Index Series.  The PureProperty series, an investable product launched on June 1 by FTSE Russell, measures capital appreciation and total returns on unlevered property investments in U.S. apartment, health care, hotel, industrial, office, and retail properties owned by listed U.S. equity REITs.

Real estate values and total returns retreated slightly in May, with assets in the West region of the U.S. outperforming holdings in other parts of the country.

Total returns from a passively managed investment in the broad listed U.S. equity REIT market averaged 11.46% per year over the 20 years ending April 2015, substantially better than the broad stock market at just 9.50% per year.  

Total returns from a passively managed investment in listed U.S. equity REITs averaged 11.45% per year over the 25 years ending April 2015, compared to just 9.95% per year for large-cap U.S. stocks. 

Some market participants may be concerned about the future course of stock prices, but the correlation between listed REITs and the broad stock market is at its lowest level in more than 12 years, suggesting that whatever factors happen to drive the non-REIT part of the market will not necessarily spill over to affect the REIT market.

While some market participants raised concerns about market volatility during March and April, the listed REIT market remained relatively calm.  As the market closed on May 5 the 20-day rolling standard deviation of trailing daily returns for the FTSE NAREIT All Equity REITs Index was 0.82%, slightly below the median value going all the way back to the beginning of 1999. 

Listed U.S. REITs returned +7.53% during January 2015 according to the FTSE NAREIT All REIT Index, which measures the total returns (stock price appreciation plus dividend payments) of all REITs traded on major stock exchanges in the U.S.  In contrast, the broad U.S. stock market suffered a decline at -1.47% according to the Dow Jones U.S. Total Stock Market Index.  Small-cap value stocks—sometimes mistakenly considered similar to REITs—did even worse at -2.11% according to the Russell 2000 Value Index, while large-cap stocks also underperformed at -1.73% according to the S&P 500 Index.