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.