REIT Industry Outlook
The U.S. REIT industry has been on a roller coaster so far this
year. After a remarkable run in the first four months, the sector
nosedived in May, as rising interest rates and skepticism about
the Fed's QE program spread caution in the market. The
apprehensions spilled over to August. (Read:
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But around mid-September, the REIT stage was again set for action
with the Fed's 'no taper' decision and lower GDP projections for
2013 and 2014, which indicated a continued low interest rate
environment in the near term.
As a result, the REIT stocks rallied the most and outperformed
the S&P 500. According to the data provided by REIT.com, on a
total return basis, the broadest U.S. REIT Index - FTSE/NAREIT
All REIT Index - gained 3.55%, outpacing 3.14% growth for the
S&P 500 in September. (Read:
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However, over the first nine months of 2013, REITs have
underperformed the broad market. Total return of the FTSE NAREIT
All REITs Index was up only 2.89% compared to the increase of
19.79% for the S&P 500. Notably, the FTSE NAREIT All Equity
REITs Index moved north 3.03% while the FTSE NAREIT Mortgage
REITs Index dropped 2.11%.
Dividends Are Key Attraction
REITs are required to distribute 90% of their annual taxable
income in the form of dividends to shareholders. Yield-hungry
investors thus have a large appetite for such stocks. This has
enabled the industry to stand out and gain a footing over the
last 15-20 years. (See:
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As of Sep 30, 2013, the dividend yield of the FTSE NAREIT All
REITs Index was 4.34%. The yield of the FTSE NAREIT All Equity
REITs Index was 3.68% while the FTSE NAREIT Mortgage REITs Index
delivered a dividend yield of 11.33%. Clearly, the REITs
continued to offer solid yields and outpaced the 2.14% dividend
yield offered by the S&P 500 as of Sep 30.
REITs raised $60.6 billion in the first nine months of 2013. A
solid IPO market in 2013 primarily made it happen.
In the first three quarters, REITs raised $3.08 billion through
14 IPOs that comfortably surpassed the $1.82 billion capital
infusion through 8 IPOs in 2012. The third quarter has been the
most active one with around $1.25 billion raised from 4 IPO
During the latest downturn, REITs were able to acquire premium
properties from highly leveraged investors at heavy discounts.
Furthermore, REITs typically have a large unencumbered pool of
assets, which could provide an additional avenue to raise cash
These assets, in turn, have provided the requisite wherewithal to
the REIT industry to grow through strategic acquisitions over
time. Moreover, the financing for sound properties is currently
abundant as willing commercial real estate lenders continue to
Macroeconomic issues and political drama have created tension in
the market. According to the Fed, the tapering would occur when
the economy strengthens and as per its recent statement, economic
activity is expanding moderately and labor market conditions are
improving. Yet, the unemployment level still remains high.
Moreover, we note that, though the third-quarter 2013 earnings
picture has improved in the most recent week, the guidance still
remains on the weak side, leading to negative estimate revisions
at a majority of the companies.
Amid such an environment and along with disappointing government
job reports, Fed's QE program may continue for a period longer
than earlier expected. This should keep the demand for
high-dividend-paying REIT stocks alive.
Also, we believe that rising interest rates should not always be
seen as a headwind to REIT stocks. Notably, interest rates move
north when the economy gains strength and this, in general,
drives demand for properties offered by REITs.
Exploring the Sector through ETFs
REIT ETFs offer a low-cost investment choice, the prospects for
return from dividend income and capital appreciation as well as
focus on spreading out assets among various companies and
reducing company specific risk. (See all Real Estate ETFs
Vanguard REIT ETF
The fund, launched over nine years ago, seeks investment results
by tracking the performance of the benchmark - MSCI US REIT Index
- which is used to gauge real estate stocks. The fund consists of
127 stocks, which acquire office buildings, hotels, and other
real property. The top three holdings are
Simon Property Group Inc.
(PLD). It charges 10 basis points in fees (as of May 28, 2013).
VNQ has managed to attract $33.4 billion in assets under
management till September 30, 2013.
iShares U.S. Real Estate ETF
Launched in 2000, IYR follows the Dow Jones U.S. Real Estate
Index that measures the performance of the real estate industry
of the U.S. equity market. The fund comprises 98 stocks with top
holdings including Simon Property Group Inc.,
American Tower Corporation
(AMT) and Public Storage. The fund's expense ratio is 0.45% (as
of September 30, 2013) and the 12-month yield is 4.05% (as of
September 30, 2013). It has $4.2 billion in assets under
management as of November 1, 2013.
SPDR Dow Jones REIT ETF
Functioning since 2001, RWR seeks investment results of the Dow
Jones U.S. Select REIT Index. The fund consists of 86 stocks that
have equity ownership and operate commercial real estate, with
the top holdings being Simon Property Group Inc., Public Storage
and Prologis Inc. The fund's expense ratio is 0.25% (as of
November 4, 2013) and pays a dividend of 3.05% (as of October 31,
2013). RWR has about $2.3 billion in assets under management (as
of October 31, 2013).
Schwab US REIT ETF
This fund debuted in 2011 and tracks the total return of the Dow
Jones U.S. Select REIT Index. The fund consists of 87 stocks that
own and operate commercial real estates. The top three holdings
are Simon Property Group Inc., Public Storage and Prologis Inc.
It charges 7 basis points in fees (as of September 30, 2013),
while the trailing twelfth month distribution yield is 2.43%.
SCHH boasts $549.4 million in assets under management (till
September 30, 2013).
First Trust S&P REIT Index Fund
Launched in May 2007, FRI is an ETF that seeks investment results
of the S&P United States REIT Index that gauges the U.S. REIT
market and retains consistency, which depicts the overall market
composition. The fund comprises 139 stocks with the top holdings
being Simon Property Group Inc., Public Storage and Prologis Inc.
The fund's net expense ratio is 0.50% (as of June 30, 2013) and
the 12-month distribution rate is 2.61% while index yield is
3.93% as of September 30, 2013. FRI has about $164.3 million in
net assets under management (as of October 31, 2 013).
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FT-SP REIT IDX (FRI): ETF Research Reports
ISHARS-US REAL (IYR): ETF Research Reports
SPDR-DJ W REIT (RWR): ETF Research Reports
SCHWAB-US REIT (SCHH): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
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