Industry Performance

I think it’s very difficult to make any thoughtful (let alone empirically based) case for predicting that the current real estate market cycle is nearing its end.  The evidence simply isn’t there.

Will the gap be closed through underperformance in what may be an overvalued private real estate market, overperformance in what seems very clearly to be an undervalued listed REIT market, or a little of both?

Equity REITs reported a 7.4 percent gain in funds from operations in the fourth quarter, according to recently-released T-Tracker® data.

The headline for the Mortgage REIT industry is a big one: the dividends paid by exchange-traded Mortgage REITs yield 10.54%, on average, as of the beginning of February 2017. 

Here’s the myth: an increase in interest rates is bad for real estate investors.  Here’s the empirical fact: the historical evidence shows that real estate investors—at least those who invest through exchange-traded REITs—have usually done better during rising-rate environments than when interest rates were declining.

There’s a persistent, predictable relationship between the liquid and illiquid real estate markets: private-side real estate valuations respond more slowly to changes in market conditions than do public-side valuations, so the values in private, illiquid markets typically lag public market values by two to five quarters on average, depending on whether participants in private markets are evaluating market conditions by looking at completed transactions or at property appraisals.  Correcting for that lag can give you a pretty good sense of whether a public/private arbitrage opportunity has arisen.

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.