Investors See REITs Outperforming S&P 500

Nearly half of investors surveyed say real estate investment trusts will outperform the S&P 500 by three percent or more over the next 12 months, reported BMO Capital Markets, Montreal, Quebec.

The financial services firm’s poll of nearly 100 real estate executives revealed that 45 percent of investors expect REITs to outperform the S&P 500 Index by at least three percent and 35 percent said REITs could outperform the S&P by as much as 10 percent in the next year.

“BMO’s outlook on the space is positive, despite the prospects of higher interest rates,” said BMO Capital Markets REIT analyst John Kim. “Rising rates are already expected in the market, resulting in wide disparities between public and private market valuations, which we do not believe are sustainable over the long term.”

Last year at this time, only 13 percent of respondents predicted that REITs would outperform the S&P, Kim said.

U.S. equity REITs outperformed the broader equity market in the third quarter, the National Association of Real Estate Investment Trusts reported. The FTSE NAREIT All REITs Index, the sector’s broadest benchmark, gained 0.76 percent in the third quarter on a total return basis while the S&P 500 declined 6.44 percent.

BMO Capital Markets poll respondents expect that better REIT performance will come in part because mainstream investors will become more interested in the sector. REITs will receive their own sector classification in the major market indices in the fall of 2016, said BMO Analyst Paul Adornato.

“Corporate and investor attendees alike expect the flow of funds from mainstream investors to increase, albeit marginally, as a result of real estate obtaining its own GICS [Global Industry Classification Standard],” Adornato said He noted that 65 percent of poll respondents said the new classification will help REITs draw more interest from mainstream investors compared to REITs currently position under the Financials category.

The poll also found that 52 percent of respondents expect residential real estate will perform best among REITs in 2015. And an overwhelming majority of respondents–84 percent–expect a rise in U.S. 10-year treasury yields over the next 12 months.

Meanwhile, Fitch Ratings, New York, recently reported that U.S. REIT credit profiles remain strong, but said they deteriorated “marginally” during the last six months.

“Growing development pipelines are selectively pressuring liquidity, discounted equity valuations have reduced financial flexibility and the debt capital markets are increasingly distinguishing between issuers with respect to borrowing cost and access,” Fitch said. But the ratings firm said property-level fundamentals remain strong for most property types and noted that companies are generally well capitalized, saying “both leverage and fixed-charge coverage compare favorably with their respective long-term averages.”