The year 2014 opened up like a Chinese box for the U.S. real estate investment trusts (REITs), each revealing a new surprise. Thanks to the treasury yields and interest rates movement, the REIT industry had a profitable 2014.
In fact, the U.S. REIT stocks made a solid turnaround this year, following the underperformance to the broader equity market in 2013. As of Dec 24, the FTSE NAREIT All REITs Index ascended 28.2% compared to the S&P 500's (SPX) 14.9% gain. This compares to last year's FTSE NAREIT All REITs Index's gain of just 3.2% as against the S&P 500's decent 32.4% run up.
economy Played the Key Role
REITs are often treated as bonds because of their high dividend paying nature and therefore, treasury yields end up playing a significant role in their price movement.
The year 2014 witnessed some unusual movements in yields. At the start of the year, treasury yields hovered around 3% and there were expectations of it reaching 3.5% by the year end. But defying all predictions, the treasury yields tanked before recovering slightly in recent times on the +5% GDP report. And market analysts again expect it to be within 3% by year-end 2015, signaling a relief for the REIT industry.
Moreover, even though the Federal Reserve wrapped up its bond buying program this year, the agency adopted a dovish attitude on hiking interest rates.
The Fed commented that it would keep its key lending rate near zero for a “considerable time” before replacing it with the phrase “the committee judges it can be patient” in its latest December meeting. Further, with the Fed Chair disclosing that the committee is not anticipating rate hikes in at least a couple of next meetings too, the REIT investors heaved a sigh of relief and continued to build their hopes.
Investors also looked beyond these factors and appreciated the fundamentals of the industry. They recognized that global issues could not interrupt economic recovery in the U.S.
An enhanced consumer confidence and cheap oil prices boosted purchasing power of consumers, driving up economic activity and steadily leading to elevated demand for real estates.
But with the sluggish pace of economic recovery over the past quarters, supply of new construction remained modest, giving the present real estate owners a solid scope to capitalize on. Financially too, the REITs beefed up their strength by leveraging on the low rate environment for refinancing their debts, which is encouraging.
