Investors who put money into a real estate investment trust at the beginning of 2000 earned higher returns by the end of the decade than from their investments in any other equity sector, according to research released Thursday by the National Association of Real Estate Investment Trusts.
Investors who put $10,000 into the FTSE NAREIT Equity REIT Index at the beginning of the decade finished it with $27,454, according to NAREIT. By comparison, investors who invested the same amount in the Standard & Poor’s 500 Index finished the decade with $9,090.
A similar investment in the NASDAQ Composite Index or the Russell 2000 Index yielded $5,577 and $14,127 respectively.
“The average annual total returns from U.S. REITs over the past decade were more than ten times the total return of the S&P 500,” said Michael Grupe, NAREIT’s executive vice president of research and investor outreach.
Analysts attributed this growth to strong growth in the real estate sector in the beginning of the decade and a sharp recovery in the second half of last year.
Peter Slatin, a real estate analyst and the editorial director of Real Capital Analytics, a New York analytics company, said that through March 2007, REITs outperformed every sector of the market for the first seven years of the decade. He said from the early 1990s through the end of 2006, the REIT industry exploded from a $10 billion industry to a $350 billion industry.
“There was this wave where the REIT industry transitioned from a totally private, closely held, privately-run, fragmented industry to a more public industry,” he said.
Until early 2007, Slatin said, there was a “trading card mentality” with real estate.
“It was fashionable to spend more money on an investment property that was half empty in a good location, rather than a building that was 95% leased because rents were rising so investors were looking for opportunities,” he said. “Now, that has turned and the only buildings that are selling are those that are fully leased with stable tenants. That is what real estate should be about. REITs are not growth stocks. They should provide some growth but the impetus for REITS was as an income play.”
From May 2007 through March, the REIT market peaked and investments lost about 75% of their value, Slatin said. He said since they have regained about two-thirds of those losses as investors saw an opportunity to buy REITs at very low prices.
In the 10-year period that ended Dec. 31, the FTSE NAREIT Equity REIT Index delivered an average annual total return of 10.63%, and the FTSE NAREIT All REITs Index provided an average annual return of 10.18%. Over the same period, the average annual total return from the S&P 500 was minus-0.95%, and from the NASDAQ Composite, it was a minus-5.67%.
The Russell 2000’s average annual total return was 3.51%.
“Total returns of the FTSE NAREIT Equity REIT Index over the long term typically have been in the 10-plus percent range,” Grupe said. “In addition to outperforming the other equity benchmarks over the past decade, the equity REIT index outperformed them over the past 15-, 20-, 30- and 35-year periods. Despite the turmoil of recent years, long-term investors who maintained their investments in REITs and publicly traded real estate were rewarded for their discipline.”
Last year, REITs also performed well, outperforming most other market benchmarks for the year. The FTSE NAREIT Equity REIT Index rose 7.15%
in December, with full-year 2009 total returns of 27.99%.
The FTSE NAREIT All REITs Index increased 6.43% in December and 27.45% for the year.