The past year was not a good one for REITs, at least, not when compared to returns for private real estate. The FTSE NAREIT Equity REIT Index had a total return of approximately 3.2 percent in 2015 (with a year-end dividend yield of 3.9 percent and price index drop of 0.7 percent), but public REIT pricing is not keeping pace with private real estate prices.
Fourth quarter valuations aren’t yet available for the private real estate markets, which take a little more time to establish (unlike the immediacy of the stock market). But a head-to-head comparison of third quarter data makes clear private and public markets have been in two different worlds.
The NCREIF Property Index had a total return of 13.5 percent for the 12 months through October 2015, while the FTSE NAREIT Equity REIT Index for the same period had a return of 5.8 percent. Open-end diversified core equity real estate funds, NCREIF’s NFI-ODCE, had a 12-month total return of 14.9 percent through the third quarter.
The NPI is an appraisal-based index, but the Moody’s/RCA Commercial Property Price Index, a repeat-sales index, had similar results over the same period. The CPPI’s National All-Property Composite Index had a year-over-year increase of 14.2 percent through October 2015.
This divergence raises a number of questions, chief of which is: Are public REIT stocks undervalued, or is private real estate overvalued? Or is the divergence evidence of the difference between public and private real estate, establishing that public real estate investments are more stock-like than direct property-like?
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Loretta Clodfelter is editor of Institutional Real Estate Americas.
