Any thoughts on REIT run up so far?

[golfallday]

VNQ is +13.3% YTD. Is that due to foreseeable low interest rate environment after BREXIT vote? Investors chasing yield/dividends? Is there some fundamental that's driving this surge? Just wondering. I invest in the Total US Market Index, so I do have REIT exposure; I do not invest in an ETF or index that specifically tracks REITs. I'm just curious.

[truenorth418]

Yes, I think it's great!

I suspect it's due to the low interest rates, and if rates rise we'll see REITs get knocked.

[staythecourse]

Yes, I think it's great!

I suspect it's due to the low interest rates, and if rates rise we'll see REITs get knocked.

Answer to the OP is who knows. Stuff goes up and down all the time in the short run and nearly (if not) 100% of the time no one knows why.

For the second poster I am not sure the data supports your notion. I believe there have been studies done and REITS have not been "knocked" by increasing rates. I believe they tread water as their past MO.

Good luck.

[garlandwhizzer]

In my view REITS are overvalued now and have been overvalued for long time. I have refused to buy them for several years for this reason and I've stood on the sidelines and watched as they continued to climb in value, getting more and more overvalued. I don't know when their great run will stop. I suspect that many investors prefer them to stocks because of their dividends and perhaps because they believe that real property in the US has a lower risk profile than real businesses.

A significant part of their dividends comes from "return of capital" instead of ongoing operations. The following quote is from Vanguard regarding admiral shares of its REIT fund.

The current unadjusted effective yield is 3.77% as of 05/31/2016, which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).

The current adjusted effective yield is 2.57% as of 05/31/2016. The adjusted yield reflects a reduction in the income included in the yield based on the average return of capital and capital gain distributions received from the fund's REIT investments for the past 2 calendar years. (These percentages are 29.91% for 2015 and 31.44% for 2014.)

Other than sales of properties which generate return of capital and capital gains, the dividend income generated from ongoing REIT operations alone is 2.57%, lower than the Vanguard high dividend yield index fund (3.1%) which has broader industry diversification, higher return on equity, and a higher long term expected earnings growth rate. I confess that I don't understand why US REITS have outperformed so well. Perhaps investors believe that US real property has less intrinsic risk than US businesses. I'll continue to stay on the sidelines telling myself the same thing that I've been telling myself for years: ultimately prices revert to underlying fundamentals.

Garland Whizzer

[simplesimon]

I'm glad I have them now. I won't be as glad when they're going down.

[nedsaid]

VNQ is +13.3% YTD. Is that due to foreseeable low interest rate environment after BREXIT vote? Investors chasing yield/dividends? Is there some fundamental that's driving this surge? Just wondering. I invest in the Total US Market Index, so I do have REIT exposure; I do not invest in an ETF or index that specifically tracks REITs. I'm just curious.

I will give it a shot though it might not be the correct answer. I think it is a combination of yield chasing and the fact that US REITs don't have currency exposure as do International Stocks and US Multinational companies. Currency is large on people's minds right now as the British Pound took a big drop after the Brexit vote. I suppose REITs might be considered a bit of a safe haven.

Recently, I trimmed my REITs by almost 20% because of valuation concerns.

[White Coat Investor]

Nice to be rewarded for holding and rebalancing them in 2008 after I lost 78% of my initial investment in the asset class.

[Whiggish Boffin]

White Coat Investor said:

Nice to be rewarded for holding and rebalancing them in 2008 after I lost 78% of my initial investment in the asset class.

Hey! I did that, too! Went all-in on a Swensen portfolio in Jan. 2007 (30% US stock, 15% developed int'l stock, 5% emerging int'l stock, 20% REIT, 15% Treasuries, 15% TIPS). I learned something about myself that year -- I can follow a rebalancing discipline in extreme market fluctuations, even though it feels awful.

(Maybe I'll get to do it again. I had an insecure job then. I have a TIPS ladder now.)

[abuss368]

Nice to be rewarded for holding and rebalancing them in 2008 after I lost 78% of my initial investment in the asset class.

I did not remember REITs dropping that much. Wow!

[abuss368]

Stay the course with REITs.

[patriciamgr2]

I'm not one of the Forum's REIT experts, but I will point out that in the fall, REITs will have a separate index (no longer with the Financials ). A recent WSJ article speculated on tax effects of the forced sales on holders of Financial sector funds, but also mentioned a belief that the separation will highlight REITs' recent run & thereby increase overall demand for REITs from investors.

I also note that Larry Swedroe recently published an article (discussed here on this Forum) arguing that REITs were overvalued.
viewtopic.php?f=10&t=194420

There certainly are a lot of folks chasing yield these days, however, so any fundamental valuation issues may not surface for a while.

[peterinjapan]

Personally I am dead sure that U.S. real estate, especially residential, will continue to rise sharply over the next 10 years, from demographics and forward momentium. Are there any other investments other than REITs (hopefully ones that are based on the real value of the properties held and rents taken in, and not leverage) we could be considering?

[unclescrooge]

I can't say whether REITS are overvalued or not, but there are limited choices for an investor looking for yield. I feel that yield chasing may lead to continued appreciation.

[livesoft]

REITs dropped 10% in 2015 I think partly because of all the talk about the raising of the Fed funds rate (and the raising of interest rates). I think REITs are just like a leverage bet on interest rates, but because they don't have "bond" in their names that the lay person doesn't think about that too much.

So after the December rate hike people were really worried about the next rate hike by the FOMC earlier this year. It would have been a couple rate hikes in a row. We now know that did not happen, so I think REITs responded to that.

More recently, folks were really thinking that interest rates would go up in June. That did not happen. And now folks do not think interest rates will go up for the rest of the year, so interest-rate sensitive investments like REITs and bonds have attracted more money. Bonds have had a great year because of all this, but REITs are leveraged, so they have responded even more.

So I think the run up of REITs is because they came off a lower base and are driven by the lack of change in the Fed funds rate and the expectation (whether correct or not) that interest rates will not go up the rest of the year.

[abuss368]

I just "peeked" and wow REITs are on fire. Both U.S. and International.