REITs Up in March, Lag Broader Market

While REITs made gains in March, they lagged behind a broader stock market that is continuing to play “catch up,” according to industry analysts.

Data from the FTSE NAREIT U.S. REIT Index showed that U.S. equity REITs posted of 3 percent in March. That trailed the S&P 500, which posted total returns of 3.75 percent. Anthony Paolone, an analyst with J.P. Morgan, said that with the stock market having turned “very pro-cyclical and robust,” it created a natural environment where REITs would be likely to lag. 

“REIT performance year-to-date has been respectable, especially on a risk-adjusted basis. It’s kind of been moving up towards what we think of being fair value to the higher end of the fair value,” Paolone said.

The more bullish investors are about the broader equity market, the greater the likelihood that REITs will trail it, according to Paolone.

Brad Case, NAREIT’s senior vice president of research and industry information, also emphasized that REITs had been outperforming the overall stock market before it took a turn for the better.

“So, a lot of what’s going on is that the stock market is catching up to what REITs have been doing for a while,” Case said. 

In addition to mortgage REITs, which had total returns of 5.5 percent in March, Case added that timber was another sector that performed particularly well in March. Timber led the pack for REITs and was up 7.3 percent for the month. Timber REITs have been one of the industry’s best performing sectors in 2013 with total returns of 15.5 percent through the end of March. 

Susan Persin, managing director with Trepp LLC, a commercial real estate consulting firm, said timber REITs have benefitted from increased demand and higher sales prices for wood products. “The number of residential building permits issued on a seasonally adjusted basis climbed 4.6 percent to 946,000 in February, a positive signs for lumber demand,” she said.

Paolone also pointed out that investors have displayed interest in net lease companies in light of the mergers-and-acquisitions activity taking place among that group.