Skip to main content

You are here

Blog Listing Page

REITs: quenching the thirst for income

By: Catherine Yoshimoto, Sr. Index Product Manager

Persistently low interest rates have affected traditional sources of income such as bond coupons. Income-thirsty market participants may feel like they are waiting for a rain drop in a drought. Real estate has traditionally been viewed as an income generating investment, yet a direct investment in a commercial real estate property can be expensive, illiquid and fraught with inconsistent yields. Listed equity real estate investment trusts (REITs), however, provide a tradable liquid alternative to direct real estate investing.

REITs provide a way for individuals to earn a share of the income deriving from the ownership of commercial real estate. The shareholders of a REIT earn a share of the income produced through real estate investment, without actually having to go out and buy or finance property. Under US law, among several requirements to qualify as a REIT, a company must pay 90% of its taxable income to shareholders in the form of dividends each year. As a result, US REITs have tended to be among the sectors of the equity market offering higher-than-average yield.

In 2006, FTSE partnered with the National Association of Real Estate Investment Trusts (NAREIT) to launch the FTSE NAREIT US Real Estate Index Series. This six-index series represents the US stock exchange-listed REIT industry, and equity REITs comprise 95% in market cap of the investable opportunity set. The FTSE NAREIT Equity REITs Index (ticker: FNRE) covers 83% of the investable US REIT market and includes all equity REITs in the index universe with the exception of those focused on timberland and infrastructure.

An equity REIT generates income through owning and operating real estate properties. Given the requirement by US law for REITs to pay out 90% of their income as dividends, the chart below should come as no surprise. The dividend yield of the FTSE NAREIT Equity REITs Index has consistently exceeded that of the Russell 3000® Index over the last 5 years. But dividend yield is only one portion of total return—we must also consider price (capital) appreciation. 

 

On a total return basis, including both price and income return, we can see below that the FTSE NAREIT Equity REIT Index has also consistently outperformed the all-cap US Russell 3000 Index over the last 20 years. Over this period, dividends contributed nearly two-thirds of the total return for the FTSE NAREIT Equity REIT Index.

As traditional sources of income like bond coupons have all but dried up, market participants may find it interesting to follow the performance of the FTSE NAREIT Equity REITs equity index. Perhaps the relatively high dividend yield may, after all, provide some raindrops in the drought.

For more information, see the FTSE NAREIT US Real Estate Index Series. For additional  research on this topic, please see the FTSE Russell Insights paper, Understanding the benefits of REITs in the US market.

  

----------------------- 

© 2016 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they  might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication  should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a license from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.

Blog Listing Page