Excerpts of this article appeared in the March 2019 edition of the Forbes Real Estate Investor.
March is one of my favorite months in the year, especially because that’s when the biggest college basketball tournament takes place, and I’m a big fan. I played basketball back in the day but since I mostly warmed the bench, I didn’t get drafted by the NBA.
Instead, I went on to become a financial writer. My passion for the sport has not faded and I’ve even found ways to utilize the set of skills needed to play the game in my investment pursuits. I use my offensive and defensive skills to score the best REIT returns and as editor of this newsletter, I like to think of myself as the coach to subscribers who depend on me for honest and dependable guidance.
It’s a responsibility and honor I take very seriously. It’s also something we’re going to have fun with this month. In this issue, I’ve put together my own “March Madness” brackets for each REIT property sector. You’ll also find an updated rhino rating model, in which we pick the best REITs to own across the various categories.
As you know, diversification is critical to a healthy investing model and REITs are an important form of diversification for many reasons. Perhaps the most important is how REITs have delivered long-term total returns that generally match—and often beat—broad market aggregates.
For example, the 25-year compound annual total return on the FTSE Nareit All Equity REITs Index through January 2019 was 10.3%, a full percentage point higher than what the S&P 500 managed over the same period.
In addition, REIT returns are not highly correlated with the broader stock market. It’s easy to see how this diversification works when you examine the range of returns across different REIT property types over both short- and long-term horizons.
U.S. Equity REITs posted a total return of 11.6% in January compared to 8% for the S&P 500. The various property sectors, meanwhile, delivered returns ranging from 6.4% for self-storage REITs to 18.2% for timber REITs. Seventeen different REIT sectors outperformed the S&P 500 during this 31-day stint.
Over the 12 months through January 2019, REITs delivered a total return of 10.3% while the S&P 500 declined 2.3%. Ten different REIT sectors made double-digit improvements over this period, with freestanding retail, which may surprise you, topping the list at 34.2%. Both the high returns and diversification benefits of owning REITs across property types hold up over longer time periods as well.
In the past five years, the total return for the FTSE Nareit All Equity REITs Index was 10%, slightly behind the S&P 500. But when you break it down, there were seven REIT sectors that featured total returns in the double-digits, led by manufactured homes (23.9%), infrastructure (16.7%) and industrials (16.2%).