REITs: Laggards, but for how long?

Rising rates and high expectations have hurt the real estate vehicle, but a few factors could brighten its outlook

Mar 29, 2017 @ 5:41 pm

By John Waggoner

In this market, looking for bargains is like looking for a good show on local cable at 2:00 in the morning. While commercial real estate isn't cheap, REITs offer decent yields — and the chance to buy something that hasn't participated in the latest bull move.

Even though the Standard & Poor's 500 stock index has gained 18.3% the past 12 months, the real estate sector has risen just 6.1%, according to Morningstar (MORN). Even in the rally this year, buoyed by the prospects of tax cuts and reduced government regulations, REITs have gained just 0.6%, versus 5.9% for the blue-chip index.

What gives? Traditional reasons for REIT underperformance, for a start. The 10-year Treasury note rose from 1.37% in July last year to 2.61% on March 13. Wall Street often sees REITs, like utility stocks, as bond proxies, and bond prices fall when interest rates rise.

The other problem was a happier one: "REITs have been on a tear the past couple years," said Gregg Fisher, manager of Gerstein Fisher Multi-Factor Global Real Estate Securities Fund (GFMRX). They needed a rest for results to equal expectations, he said. "If you have prices that expect greatness, even if they do great, they could do less than we expected them to be."

Mr. Fisher, whose fund is split roughly between global and U.S. REITs, thinks the global section of the portfolio might be better performing going forward. The U.S. economic recovery is long in the tooth, and rates are rising. In other areas of the world, such as Europe, the economic recovery is young and rates are still low.

The fund ranks third among global real estate funds the past three years and, as its name implies, is largely a quant fund. The two factors that make the most difference, according to Mr. Fisher:

Size. As with common stocks, small is often better. Smaller REITs tend to outperform — and to be less-followed by their larger brethren.

Leverage. REITs that use lots of borrowers often fare well in a rip-snorting bull market. But over a long cycle, leverage hurts on the downside, and makes it more difficult for REITs to borrow when prices are low.

"We tend to dial down risk with leverage and dial up risk with size," Mr. Fisher said.

As for prices, he looks to relative value.

"We look at things on a relative measure and let the market do the work," he said.

REITs have the advantage of yield — the typical REIT yields about 4.16%, according to NAREIT, the funds' trade group, compared to less than 1% for a money market fund and 2.39% for a 10-year Treasury note.

Much of the market's recent rally has been built on the premise that lower regulation and taxes will send the economy soaring — and President Trump is, after all, a real estate developer. Should those expectations pan out, then U.S. real estate funds might be the way to go. Otherwise, it might be wiser to spread your risks globally.


What do you think?

View comments

Recommended for you

Featured video


What's the top issue on advisers minds?

Laura Pierson from Carson Group discusses how the old topic of 'Human Capital' is hot again because of millennials.

Latest news & opinion

New ways to pay for college

Experts respond to real-life scenarios of people struggling to afford higher education.

How technology is reshaping the advice business

Artificial intelligence, Amazon and robo-advisers are some of the topics on the minds of tech experts.

Best- and worst-performing sector funds and ETFs this year

A rising tide may lift all ships, but a bull market doesn't lift all stock sectors. Here are the best- and worst-performing sectors this year, with the top and bottom fund in each sector.

Betterment slapped with $400,000 fine from Finra

Robo-adviser cited for violating customer protection rule and not maintaining its books and records correctly.

Supreme Court ruling on SEC judges unlikely to upend advice industry

But it could give rise to new hearings for some advisers who are already in litigation with the agency such as Dawn Bennett.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print