Good News Becomes Bad News For REITs by Brad Thomas

Summary

Done deal. US equity markets closed a wild week at fresh record highs after the U.S. and China clinched a long-awaited "Phase One" trade deal to avert tariffs on Sunday.
Along with a decisive election victory in the UK, the trade deal seems to resolve two critical geopolitical uncertainties. Investors, however, remain skeptical after endless false-starts in the trade dispute.
Good news has seemingly become bad news for the domestic, defensively-oriented REIT sector, which was on pace for a banner year before losing altitude over the past two months.
With potential clarity on key macroeconomic uncertainties, investors fear a return of the "rates up, REITs down" paradigm that dogged the REIT sector for 2016 through 2018.
For now, the "Goldilocks" macroeconomic environment under which REITs thrive remains intact. CPI and PPI data this week continued to reflect muted inflationary pressure.
This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Get started today »

Real Estate Weekly Outlook

A wild 24 hours of geopolitics appeared to resolve months of macroeconomic uncertainty both in the U.S. and across the pond, sending domestic equity markets to fresh record highs. Just two days before the planned punitive tariff hike on Sunday, the U.S. and China agreed to a limited trade deal that signaled a temporary truce in the escalating trade dispute between the two largest economies. In the United Kingdom, a decisive election victory for the conservatives all but assured a U.K. "Brexit" from the European Union, removing a lingering cloud hanging over the Eurozone.

(Hoya Capital, Co-Produced with Brad Thomas through iREIT on Alpha)

For the third straight week, the S&P 500 ETF (SPY) finished at record weekly closing highs, climbing 0.8% on the week and bringing the large-cap index's total returns to just shy of 30% for the year. Good news has seemingly become bad news for the domestic, defensively-oriented REIT sector, which was on pace for a banner year before losing altitude over the past two months. The broad-based Real Estate ETF (VNQ) finished the week lower by nearly 3% with the most yield-sensitive sectors including net lease and healthcare down by 5% or more on the week.

As discussed in our recent Real Estate Earnings Report, REITs aren't bonds, but they sure act that way at times. The near-lockstep correlation between the broad-based Real Estate ETF (VNQ) and the 10-Year Treasury Yield (IEF) has been a continuing theme throughout the post-recession period and hasn't shown any signs of letting up in 2019 explained in part by the high degree of passive ownership of REIT shares. Correlations between individual REITs tend to be even more elevated in periods like these with significant macroeconomic headlines. This week's laggards included mall REITs: Washington Prime (WPG) and CBL & Associates (CBL); healthcare REITs: Medical Properties (MPW) and Healthpeak (PEAK); and net lease REITs: Spirit Realty (SRC), W.P. Carey (WPC), all of which were off by more than 5%.

...Originally Posted On Seeking Alpha

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