By Salvatore Bruno via Iris.xyz
Real estate investment trusts (REITs) are off to a strong start in 2019, with the Morningstar U.S. REIT Index up more than 14% year-to-date through April 17, 2019. On a trailing one-year basis, that number is a little over 17.5% (source: Bloomberg).
What’s behind this? REITs are generally responsive to three factors: the level of interest rates, the real estate cycle, and GDP growth. Interest rates have been up and down over the past year, but have generally been declining follow the Fed’s December decision to hold off on further increases to the Fed Funds rate.
At the same time, there’s a growing sense that the economy, while slowing, will continue to expand. A growing economy is generally good for real estate, too – office space is leased, multi-family homes are occupied, and industrial facilities are busy moving goods around. As to real estate itself, there may be some overbuilding in certain property types in a handful of markets, but it does not appear to be universally over-extended.
A roller coaster ride
This all contrasts to early last year when the Fed was raising rates and the expectation was for two or three more increases in 2019. There was concern then that the economy was heading into recession. In 1Q18, the 2-year Treasury yield jumped 39 basis points from 1.88% to 2.27% and REIT returns fell (as measured by the IQ US Real Estate Small Cap REIT Index), losing -9.1%.
In 2Q18, the 2-year Treasury yield continued to rise but at a slower pace, up 15 basis points from 2.27% to 2.42% at the end of May. In this environment, REIT returns began to pick up, gaining 9.4%. From June through October, yields began to accelerate once again, going from 2.42% to 2.87%. REIT returns turned down over this period, losing -2.46%. Closing out the year, yields changed course again, dropping 39 basis points. In this instance, the decline was generally ascribed to concerns over decreased growth expectations; based on this REIT returns fell -7.99%.
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