After performing strongly through the end of last year, the real estate investment trust (REIT) space has lost ground this year, largely reflecting Fed-centric anxieties. The total return from the FTSE NAREIT All REIT Index decreased 1.45% as of Oct 5, 2015 as against a 27.15% positive return in 2014.
The group's weak recent performance notwithstanding, the outlook for REITs remains favorable. Fed uncertainty no doubt remains a dominant theme for the industry, but the central bank appears in no hurry to start the monetary policy normalization process, particularly following the recent bout of soft economic data.
Fed's Course on Rate Policy and REITs
Though the Fed held off from raising rates last month, it kept alive hopes for a 2015 hike. However, since then, things have taken a U-turn with ISM numbers failing to meet expectations and the latest job numbers looking abysmal. This has caused many to suspect that the u.s. economy might have already started feeling the heat from the nagging global economic weakness. As a result, the expectation for a rate hike was further pushed back to 2016.
While the continuity of a low rate environment is now anticipated for an extended period, such an environment cannot be a perpetual one. Though REITs (those having shorter leasing periods) with the power to adjust their rent quickly to a rate hike look quite bankable, the individual market dynamics of different asset types owned and managed by the REITs would be needed the most for the stocks to excel.
After all, everything is not possible virtually, and one will eventually need “real space” for economic activities. For this special hybrid class, this is their most fundamental strength, and their ability to boost shareholders' value through steady dividend payouts makes them all the more attractive.
Dividends Still Standing Tall
The U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. And as of Jul 31, the dividend yield of the FTSE NAREIT All REITs Index was 4.14% while the yield of the FTSE NAREIT All Equity REITs Index was 3.70%. Clearly, the REITs continue to offer decent yields and outpaced the 2.07% dividend yield offered by the S&P 500 as of that date.
