13 of the worst S&P Performers this year are REITs

15 Replies

I was reading an article on another investing website that broke down the best and worst performers in the S&P 500 so far this year. The list of the 35 worst performers had a whopping 13 that were REITs. Not all of the REITs are in the same market. What does this mean to the Real Estate industry as a whole?

Originally posted by @Preston Roach :

I was reading an article on another investing website that broke down the best and worst performers in the S&P 500 so far this year. The list of the 35 worst performers had a whopping 13 that were REITs. Not all of the REITs are in the same market. What does this mean to the Real Estate industry as a whole?

I mean, if true that might in part validate a theory/conjecture of mine:

Most REI strategies focus on upside value-add potential by a personally managed competent investor (or hand-picked person designated by said person). That hands-on management is a huge part of the returns successful people see. And the failures are often a failure in exactly this area too. So you have large upside potential, and large downside. Higher risk, potentially higher profit. An "average" outcome is less likely, unless you're just buying already turnkey-ready properties at retail price with tenants already in place paying market rents (which of course would be built into a higher price), etc.

With a REIT, we're out of the "hand picked" and "hands-on management" world, and into a committee/bureaucracy world where we're going to error on the conservative/safe/orthodox side with little innovation or one-off highly property-specific type solutions. So we wouldn't really expect to see above-average returns, instead we would expect a lot of perfectly average results since the property management is just doing perfectly average management (tenant screening, repairs, maint, improvement & capex, etc etc). 

That's my little theory, anyways. What you're claiming implies below average results, which my theory doesn't predict. 

Originally posted by @Chris Mason :

I mean, if true that might in part validate a theory/conjecture of mine:

Most REI strategies focus on upside value-add potential by a personally managed competent investor (or hand-picked person designated by said person). That hands-on management is a huge part of the returns successful people see. And the failures are often a failure in exactly this area too. So you have large upside potential, and large downside. Higher risk, potentially higher profit. An "average" outcome is less likely, unless you're just buying already turnkey-ready properties at retail price with tenants already in place paying market rents, etc.

With a REIT, we're out of the "hand picked" and "hands-on management" world, and into a committee/bureaucracy world where we're going to error on the conservative/safe/orthodox side with little innovation or one-off highly property-specific type solutions. So we wouldn't really expect to see above-average returns, instead we would expect a lot of perfectly average results since the property management is just doing perfectly average management (tenant screening, repairs, maint, improvement & capex, etc etc). 

That's my little theory, anyways. What you're claiming implies below average results, which my theory doesn't predict. 

 The companies on the list weren't just performing below average, they were actually losing value this year. Your theory is very interesting. You're basically saying that individuals who are running their own portfolio will have better returns because they are focusing more closely on adding value to each property. I do agree with that for the most part. 

I suppose it could be poor management decisions that would cause these REITs to lose value, but what has me questioning it is that they are mostly in different industries. It's not just multi-family REITs. There's also a self storage company among others. Also, NONE of the top performers are in the real estate market. As a matter of fact, the real estate sector as a whole has a total return -2.6% so far this year. The only other negative return sector in the S&P 500 is utilities. Everything else has posted positive returns so far this year.

ummmm the S&P hit 22% last year

I don't think it's a wild claim to say the average RE investment isn't hitting 22%, so of course it'll be lower when you compare it to a year when equities were on a bull rampage.

Originally posted by @Alexander Felice :

ummmm the S&P hit 22% last year

I don't think it's a wild claim to say the average RE investment isn't hitting 22%, so of course it'll be lower when you compare it to a year when equities were on a bull rampage.

 Yes, that's true. The real estate sector only increased by 10.8% last year, compared to some other sectors that were in the mid 20s, but this year it is actually losing money while almost every other sector is still booming.

@Preston Roach No expert on the subject, but take it with a grain of salt. I don't think REITs typically take on large value-add strategy. A lot of people want to add value to large commercial deals in order to sell to REITS. A lot of their investors are likely pensions/institutional so they focus a bit more on the safe side than maybe other real estate investors. 

Originally posted by @Preston Roach :
Originally posted by @Alexander Felice:

ummmm the S&P hit 22% last year

I don't think it's a wild claim to say the average RE investment isn't hitting 22%, so of course it'll be lower when you compare it to a year when equities were on a bull rampage.

 Yes, that's true. The real estate sector only increased by 10.8% last year, compared to some other sectors that were in the mid 20s, but this year it is actually losing money while almost every other sector is still booming.

we are only 6% of the way into the new year. If the data is only for this year I would take it even less seriously.

If you look at the last 6 months of 2017 you would think bitcoin is the best investment of all time, gotta look at a larger time scale

10% for REIT is good, 10% for any investment is good. Also, RE is big around here for big returns and lots of value add, for many people RE is simply a safe place to provide long term consistent returns on equity, 10% more than satisfies that

@Preston Roach I'd say it's meaningless, from a fundamentals perspective.  On these liquid assets, money moves in and out based on all sorts of things outside the control of the actual company, much less the viability of the properties that company holds.  The fact that a trend is across the whole sector makes that more likely.  All sorts of things impact that in the short term:

  • Federal funds rate
  • Commercial interest rates
  • Relative attractiveness of other asset classes
  • Relative attractiveness of other corporate equities
  • Capital inflow to and outflow from US markets
  • Value of the US dollar
  • Regulation of the pension funds and other large coglomerate investors in REITs (that don't typically directly invest in property like people on this site do)
  • Impact of technical traders who don't even know what a REIT does  ;)

I suppose many of these could impact the overall real estate industry (at least the commercial property side), but I wouldn't use 3 weeks of public market action as an indicator of anything.

My guess is that a lot of investors invest in REITs as an easy way to get exposure to real estate and for the yield. These securities may act more like bonds when rising interest rates are anticipated.

On the other hand, one could argue that a rise in interest rates reflects a strong economy so the underlying assets should continue to do well.

The performance of the various REIT sectors probably reflects the underlying fundamentals of the RE sector they are in. For example, I think a lot of the apartment REITs reflect concerns over increasing supply and plateauing/declining rents in higher end properties which a lot of the large apartment REITs are focused on. The "Amazon effect" is causing investors to flee shopping center REITS in favor of industrial warehouse REITs, etc.

Originally posted by @Preston Roach :

I was reading an article on another investing website that broke down the best and worst performers in the S&P 500 so far this year. The list of the 35 worst performers had a whopping 13 that were REITs. Not all of the REITs are in the same market. What does this mean to the Real Estate industry as a whole?

 Yup. I track the IYR ETF as general real estate sector health. Recently it broke a key uptrend line. It was due to sudden rise in bond yields which affect real interest rates. Part of normal economic cycle. 9 years of bull run. And now central banks unwinding liquidity. We will see if rates continue to rise. 

My approach is simple:

1) Stock market: I invest in mostly mutual funds and a few stocks. I'm okay with some risk and I have a long time horizon. Always looking to beat the market. My Roth IRA was up 25.6% last year.

2) Invest in local real estate in a market I know. Greater likelihood of finding a great deal and getting great returns.

With this approach, I don't invest in REITs. As others have said, a REIT seems like an investment for someone who wants to have some exposure to real estate. I don't want exposure, I want the title!

@Zach Quick agree w/your comment. The buyer of value add syndicate properties are typically REITs. They are looking for properties that are stabilized (they don't want to do any renovations, turn around strategies for the most part) and are looking for yield. Safely leveraged they are targeting the 8-10 yield. Value add players are targeting 8-10% CoC and 16 - 18 % IRRs over a 2-5 year hold. Slow motion flip. Totally different strategies and expectations.

REIT's tout diversification as a buy in. The REIT's tend to be more volatile and can have bull to bear years.

Personally it's not my cup of tea compared to other investments.

I do not think it says much about the market. REIT's can be highly cyclical like some stocks. 

have the dividend amounts decreased or have they maintained the same amount?  If REITs go down in share price it could mean that institutions are selling them to get into more growth oriented stocks since it looks like we are in a recovery.  This is assuming the dividends remain steady or are growing.

@Preston Roach I think it's pretty much due to the fact that many investors will sell off certain high-yield investments including REITS when interest rates are rising. The 10 year treasury has reached highs not seen since 2014 recently.

Also, there are a few sectors within REITS hurting for certain specific reasons, retail because of the 'Retail Apocalypse' non-sense and health care because of fears of government spending cuts.

Personally, I'm using the weakness to buy REITS because they historically perform well during periods of higher interest rates due to the rent growth it allows. 

And being contrarian in nature, I'm mainly buying retail and healthcare REITS.

Originally posted by @Alexander Felice :

ummmm the S&P hit 22% last year

I don't think it's a wild claim to say the average RE investment isn't hitting 22%, so of course it'll be lower when you compare it to a year when equities were on a bull rampage.

 Voice of reason. 

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