Market data:

REITs and Inflation

The REIT sector has produced unexciting performance in the last 18 months as the direction of monetary policy has reversed course.  Money flows have also been focused on high growth sectors such as technology and have largely disregarded income producing assets.  Nevertheless, the performance was positive and the rate of distributions paid continued to increase.

Valuations are generally attractive and many REITs are now trading at a discount to their Net Asset Value, a situation that historically has led to outperformance.

On a long-term basis, we generally like the REIT sector due to a number of elements such as its superior historical track record and its strong pay-outs. In this piece, we would like to provide an historical overview of the sector performance, dividends and their relationship to inflationary periods.

An historical perspective on the sector is especially important for those investors that rely heavily on income and that need such income to counter the negative influences of inflation.  Recent research from Morningstar has reviewed relative performance of stocks, bonds and REITs from 1972 to 2017 and then focused on the high inflation period of 1974 to 1980.  During these six years, the rate of inflation was 9.3%, a level significantly higher than the historical average of 4%.  In this period, bonds yielded 8.4% but lost 2.7% in in price for a net total return that was much lower than inflation.  Conversely, stocks returned 10.4%; 5% from dividends and 5% from price appreciation.  REITs were the best asset class with an income rate of 10.4% and an additional 7.5% in price change. 

The price of such outperformance comes in the form of volatility; naturally, REITs (and stocks) are significantly more volatile than bonds.  In order to grasp volatility in terms of actual influence on an investor’s portfolio, we have included a table listing yearly returns of the NAREIT All Equity REIT Index from 1972 to 2017 (see below after Sources).  We are showing total return and price return alone.  One can see that the great performance of the 1974 to 1980 period was preceded by a 24-month negative period.  The only other two 24-month periods that produced negative results were in 1998-1999 during the tech boom (a period similar to the current one), and in 2007-2008 during the Great Financial Recession.

As always, we must consider that past performance is not necessarily a predictor of future performance but it does lay the foundations for an informed analytical process.

Should you be interested in discussing the REIT sector more, please feel free to contact our team at 310-867-2255 or via email: Davide Accomazzo, This email address is being protected from spambots. You need JavaScript enabled to view it.

Sources:

  • Morningstar, Dividends and Inflation, 2017
  • REIT.com

About the data: REITs represented by FTSE NAREIT All Equity Index, stocks by Ibbotson Large Company Stock Index, bonds by the 5-year US government bond and inflation by CPI.

 


 

Annual Returns for the FTSE Nareit U.S. Real Estate Index Series 1972 - 2017

 

FTSE Nareit All Equity REITs

   

Total

 

Price

Year

 

Return (%)

Index

 

Return (%)

Index

1971

 

 

100.00

 

 

100.00

1972

 

8.01

108.01

 

1.08

101.08

1973

 

-15.52

91.25

 

-21.78

79.07

1974

 

-21.40

71.72

 

-29.33

55.88

1975

 

19.30

85.56

 

8.34

60.54

1976

 

47.59

126.28

 

36.21

82.46

1977

 

22.42

154.59

 

13.97

93.98

1978

 

10.34

170.57

 

2.66

96.48

1979

 

35.86

231.73

 

25.49

121.07

1980

 

24.37

288.20

 

1.95

123.42

1981

 

6.00

305.50

 

-2.03

120.92

1982

 

21.60

371.49

 

11.49

134.81

1983

 

30.64

485.30

 

21.01

163.13

1984

 

20.93

586.86

 

9.30

178.30

1985

 

19.10

698.93

 

9.62

195.45

1986

 

19.16

832.83

 

10.56

216.10

1987

 

-3.64

802.51

 

-10.31

193.82

1988

 

13.49

910.74

 

4.77

203.07

1989

 

8.84

991.26

 

0.58

204.24

1990

 

-15.35

839.09

 

-26.45

150.21

1991

 

35.70

1,138.61

 

25.47

188.47

1992

 

14.59

1,304.73

 

6.40

200.54

1993

 

19.65

1,561.17

 

12.95

226.51

1994

 

3.17

1,610.67

 

-3.52

218.55

1995

 

15.27

1,856.57

 

6.56

232.88

1996

 

35.27

2,511.32

 

26.35

294.24

1997

 

20.26

3,020.11

 

13.33

333.47

1998

 

-17.50

2,491.53

 

-22.33

259.00

1999

 

-4.62

2,376.42

 

-12.21

227.37

2000

 

26.37

3,002.97

 

16.51

264.90

2001

 

13.93

3,421.37

 

5.85

280.40

2002

 

3.82

3,552.10

 

-3.12

271.66

2003

 

37.13

4,871.12

 

28.48

349.02

2004

 

31.58

6,409.30

 

24.35

434.01

2005

 

12.16

7,188.85

 

6.67

462.98

2006

 

35.06

9,709.31

 

29.51

599.59

2007

 

-15.69

8,185.75

 

-19.05

485.36

2008

 

-37.73

5,097.46

 

-41.12

285.79

2009

 

27.99

6,524.25

 

21.28

346.60

2010

 

27.95

8,347.58

 

23.07

426.55

2011

 

8.28

9,039.07

 

4.32

444.96

2012

 

19.70

10,819.84

 

15.61

514.43

2013

 

2.86

11,128.83

 

-0.80

510.33

2014

 

28.03

14,247.97

 

23.44

629.96

2015

 

2.83

14,650.51

 

-0.98

623.76

2016

 

8.63

15,914.73

 

4.77

653.48

2017

 

8.67

17,295.16

 

4.52

683.05