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Retail REITs Uplift Overall Market Performance in November

Zacks Equity Research
The Brookfield Property Partners' bid for GGP triggered the rebound of the retail REIT sector. Also, solid performance from a number of other core sectors improved the overall market returns.

REITs delivered an encouraging performance in November backed by increased shareholder activity in the retail real estate market. Moreover, decent performance from a number of other core sectors improved the overall market returns.

Per data from REIT.com, total returns of the FTSE Nareit All REITs Index logged in a gain of 2.6% in the month, after reporting negative returns in the last two months — a 0.2% decline in October and 0.6% fall in September. However, the figure lagged the S&P 500’s total return of 3.1% for the month.

Particularly, total returns of retail REITs recorded 7.3% growth in November which was driven by 9.3% increase of the mall REITs and 6.8% ascend of the shopping center REITs. This was triggered by Brookfield Property Partners' $15-billion takeover offer for GGP Inc. GGP.

Among the other core sectors, that reported decent performance, were industrial REITs which gained 3.1% and infrastructure REITs that logged in a return of 2.9% in the month. For the first 11 months of 2017 too, these sectors recorded strong performance, with returns from industrial REITs ascending 24% and the same for infrastructure REITs surging 36.5%. While returns from data-center REITs edged down 0.3% in November, the sector still managed to record a return of 30.9% in the first 11 months of the year.

Over the past several quarters, a lot of issues have cropped up in the retail REIT market with consumers preferring online platforms over in-store purchases, resulting in store closures and retailers filing for bankruptcies. These have led to a decline in share prices of several major retail REITs, year to date. Nevertheless, the Brookfield Property bid for GGP was adequate to help the sector rebound. Further, solid earnings and leasing metrics indicate that the sector still has inherent strength and it seems that the price declines are overdone.

Also, retail REITs are putting in every effort to boost productivity of malls, by trying to grab attention from new and productive tenants, and disposing the non-productive ones. Amid the ongoing changes in consumer behavior, retail REITs have been avoiding heavy dependence on apparel and accessories. Rather, these companies are expanding dining options, opening movie theaters and offering recreational facilities. Eventually, such strategic measures are likely to boost traffic.

On the other hand, the e-commerce boom and healthy manufacturing environment, along with the recovering economy and job market gains, have been escalating demand for industrial real estate space.

In fact, amid economic expansion, e-commerce development and heightened urbanization, companies are shifting their strategy toward services like same-day delivery and other options, propelling demand for warehouse distribution facilities. Also, according to a report from Prologis Inc. PLD, for a given level of revenues, online retailers require three times the distribution center space compared with traditional retailers. This is opening up opportunities for industrial REITs like Prologis, DCT Industrial Trust Inc. DCT and Liberty Property Trust LPT.

Currently, GGP, Prologis, DCT Industrial Trust and Liberty Property Trust carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In addition to the above, growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure are driving demand for data-center REITs. In fact, demand is outpacing supply in top-tier data-center markets and despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.

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