Trepp: REITs Struggled in September

Real estate investment trusts posted a second month of negative total returns in September–despite their new position as a standalone Wall Street investment sector–reported Trepp, New York.

On September 1st, REITs, previously listed under the S&P’s Financials sector, became the 11th distinct S&P 500 sector.

Fitch Ratings, New York, said the listing change should increase REITs’ visibility “and likely generalist investment in the sector as commercial real estate becomes a growing part of a diversified investment portfolio.” 

But Trepp Senior Director of Research Susan Persin said the FTSE NAREIT All-REIT Index declined 1.41 percent in September “leading investors to worry about interest rates and whether REITs and their underlying real estate are overvalued.” 

Despite the sector’s pullback during the past two months, REITs returned 12.57 percent year-to-date, well ahead of broader indexes, Persin noted. “However, with the sector off to a weak fourth quarter start; will REITs continue to outperform?,” she said.

Because interest rate changes significantly affect REITs, the Federal Reserve’s September decision not to raise interest rates drew a positive reaction from the market, Persin noted. “However, more Fed officials are disagreeing with the decision not to raise rates,” she said. “As a result, a December rate hike, falling after the November elections, seems more likely. By waiting until December, the Fed maintains the status quo in order not to affect the economy and potentially influence the election.”

Persin noted that the FTSE NAREIT All-REIT total return has risen “steadily” since 2008, but said investors are becoming more cautious as they wonder how long the cycle will last. “New York City and other top-tier markets that investors watch closely have been making headlines due to market softening,” she said. “While all markets are not in a similar situation, the headlines are contributing to concern about future REIT performance.”

Trepp reported that free-standing retail REITs performed best in September with a 1.94 percent return, leading to a 34.45 percent year-to-date return. Specialty REITs posted a 1.75 percent return during September. After lagging for most of 2016, apartment REITs performed well in September with a 1.43 percent total return. Industrial REITs also remained strong during September fueled by growing e-commerce with a 0.40 percent monthly total return. 

“On the other hand, lodging, regional malls, shopping centers and office REITs posted substantial declines during September,” Persin said.