Macroeconomic uncertainty in the United States and consequent sloth in trading activity took a toll on the performance of the real estate investment trust (REIT) industry in the first eight months of 2017. In fact, the industry underperformed the broader market, as indicated by the FTSE/NAREIT All REITs Index’s total return of 7.4% over this timeframe versus the S&P 500’s 11.9% gain.
Despite this, a number of REIT categories showed strength and posted stellar returns. Among them are infrastructure REITs that have gained 34.1% through August this year, while data center REITs have posted a total return of 31.8%. Moreover, industrial REITs delivered returns of 19.3%, handily outpacing the broader market. However, retail REITs bore the brunt with the sector incurring a negative return of 11.4%.
Admittedly, interest rates and the movement of Treasury yields have dominated the returns of the REIT industry, at least in the near term. But, the latest trend of returns for the above-mentioned REIT classes suggest that the focus has now shifted to the fundamentals of the individual asset category to which these cater to, rather than interest-rate movements.
Specifically, demand-supply dynamics and the performance of tenants played a key role in shaping up REIT returns. In fact, growth in cloud computing, Internet of Things and big data is not only helping tech companies, but also driving demand for data center REITs.
Moreover, the industrial asset category hogged attention for experiencing high demand, with the economy and job market displaying signs of recovery, ecommerce gaining strength and the manufacturing environment remaining healthy. However, shrinking mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks.
Going forward, REITs dependence on debt for their business and consideration as bond substitutes for their high and consistent dividend-paying nature will still make their short-term returns susceptible to the rate hikes and movements of treasury yields to some extent.
