Chart of the Week - Rundown REITs

Despite boasting a dividend yield thrice that of the index, REIT total returns (i.e. including dividends reinvested) have lagged significantly behind vs stocks.

Since peaking in 2007, REITs have basically been in an 18-year relative bear market vs the S&P500 $.SPX(.SPX)$ — placing them at a 24-year low vs stocks, and marking a major deviation from the long-term up-trend.

REITs last suffered such underperformance in the late-80’s/early-90’s in the wake of the commercial real estate bust, and then again falling behind in the late-90’s as the dot com bubble frenzy saw this “old-economy” sector shunned.

But history rhymes, we just saw 10-15% drawdown in commercial real estate following the 2022/23 rates and inflation shock (the drawdown is more than 20% in real CPI adjusted terms). AND we are in the middle of another tech stock boom (which again has seen old economy sectors like REITs being left behind).

Eventually tech stocks will top (maybe already have?!), and commercial real estate prices have already stabilized and stopped falling. So things could soon be turning up for REITs relative performance. Probably the last ingredient would be lower interest rates.

Dwell on that for a second: REIT relative returns would benefit from a top in tech and lower yields (to trigger rotation) — that’s basically a defensive setup. So aside from offering a much better yield than stocks (you get paid to wait), it’s also effectively a defensive position at a time where risks are rising.

I will say though, they’re not without risks, the latest surge in bond yields saw REITs relinquish their rate-cut-rally gains from last year, so the sector remains at risk should interest rates surge out of control (and that is a tail risk).

But I would say the greater, more likely, and more damaging risk would be an unwind in tech stocks. Given that REITs still see deeply negative surveyed sentiment, record low ETF asset allocations (contrarian signs), oversold technicals, cheap relative value, and may serve as a tech-top hedge; I would say they are worth another look.

Key point:  REITs may be set for a relative return rebound.