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Will Risk-Off Market Reward REITs?

12 April 2013 in Trading Ideas

Despite stocks hitting another “all-time” high this week (we’ll forget about inflation for the moment), the start of the second quarter hasn’t exactly given a clear indication that the market intends to repeat the 10% rise it posted in the first quarter.

Indeed, the market’s move higher on Tuesday put it roughly at the same level it had been a week earlier. This isn’t necessarily the end of the world for investors who are long equities, but it could raise the question of whether profits should be taken soon – and whether the market may start favoring sectors that appear less risky.

Actually, that might be starting to happen.

Consider real-estate investment trust stocks, for example. This month alone, while the S&P 500 is up just 0.5%, the Dow Jones Equity All-REIT Index is up 3.6%.

This recent (and, yes, incredibly short-term) performance followed a first quarter that marked the best performance by REITs since the first three months of 2012 – but one that still trailed the broader market as investors had a high appetite for risk.

However, with this latest push, the All-REIT Index is now outperforming the S&P 500 for the year to date.

The Office Space motif is up 11.7% so far in 2013, and has risen 25.5% in the past 12 months. The Dow Jones Equity All-REIT Index is up 11.1% for the year to date and 22.67% over the past 12 months (the S&P 500 is up 10.2% so far in 2013 and 13.7% for the past year).

This dynamic between REIT stock performance and investors’ appetite for risk is obviously nothing new. As the Wall Street Journal recently noted, since the financial downturn, REITs have outperformed the S&P 500 in 11 of the past 16 quarters.1

Investors tend to favor REITs during tougher economic times because of the attractive dividends they tend pay out – historically at a higher rate than most companies. According to the Journal, the average REIT dividend yield is about 3.4%, compared with 2% for the S&P 500.

Of course, if investors consider taking a rest from seeking riskier assets, any outperformance of REITs could be in trouble.

The Journal reported, analysts would expect REITs to return about 12% to 15% as long as job growth continues (the recent employment report didn’t help), and if interest rates remain relatively low. Most REITs have managed to exceed profit expectations in the past year as an improving economy has allowed them to boost rents and increase occupancy rates.

1A.D. Pruitt, “REIT Returns Up But Trail Broader Market, WSJ.com, April 2, 2013.