REITs Defy Doomsayers Again

Real estate investment trusts have rallied over the past week as interest rate fears abated somewhat, but overall in August the NAREIT Composite Index still fell 4.25%.

However, for the year to date, the index has posted a total return of 7%, continuing a trend of beating the broader stock market, as institutional investors flock to the sector.

Thus far this year, the Russell 2000 his gained 3%, the S&P 500 is up 1.9%, the Nasdaq has fallen 1%, and the Dow Jones Industrial Average has lost 2.8%.

Mall REITs such as Simon Property Group (SPG Quote) and self-storage REITs such as Shurgard (SHU Quote) have been some of the best performers.

What's notable is that the resilience of REITs comes amid so much bearish sentiment on the group. Late last year and for most of this year, many analysts and pundits have been predicting doomsday for REITs, on the basis of interest rate fears and concerns over high valuations in the sector.

"I'm a little surprised that REITs are beating the broad market for six years in a row," says Keith Pauley, portfolio manager with LaSalle Investment Management. "What a lot of prognosticators looking for a downturn missed was that commercial real estate values have moved up dramatically."

Pauley, who himself raised some concern last year, adds that the stock prices of the REITs, "while they've had a big move, are supported by private-market values. ... I think we get worried when the stocks get way above the underlying value of their assets."

Right now, REITs on average are trading at a premium of 5% to their net asset value, which is lower than in recent years, according to Keven Lindemann, director of real estate research with SNL Financial.

One on hand, Lindemann says he's surprised at the REITs' performance and still believes stock prices will eventually come down. But on the other hand, considering the heavy fund flows into real estate mutual funds, Lindemann says the returns make sense.

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