REIT Signals Face Off With Geopolitical Headwinds

Several REIT's are outperformers in March, historically

Managing Editor
Mar 11, 2022 at 11:36 AM
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Subscribers to Chart of the Week received this commentary on Sunday, March 6.

The real estate sector has been lost in the shuffle as Wall Street grapples with the fallout from the horrors in Ukraine. Soaring oil, natural gas, and wheat prices have stolen the spotlight, while real estate has been somewhat swept under the rug. It's a nuanced, complicated thread that we'll try to untangle below, featuring some seasonal data, options activity, and broader macro outlooks.

U.S. real estate investment trusts (REIT) asset class returns for February revealed a surprising reversal when compared to year-over-year returns. REITs sport a 12-month lead of roughly 25% yet saw a nearly 4% drawdown last month. Year-to-date, per Refinitiv DataStream, REIT's are now nursing a 11.8% deficit. It's not just the U.S.; global REIT's are in the red too for the month and 2022.

Real estate is a focal point now more than ever as sanctions against Russia pile up. Per a NBC News article, Russia has been "pouring" money into the U.S. since the dissolution of the Soviet Union. Per the article above, "at a minimum, from cases reported in the last five years, more than $2.3 billion has been laundered through U.S. real estate, according to a report in August by Global Financial Integrity, a nonprofit group that researches illicit money flows.”

So should investors start cutting bait on floundering REITs, especially as Putin digs in his heels and ramps up invasion efforts? Not necessarily, because there is seasonal data that could combat the macro headwinds.

Per a list compiled by Schaeffer's Senior Quantitative Analyst Rocky White, five REIT's showed up on a list of best-performing S&P 500 Index (SPX) stocks in March the last 10 years. That's easily the most of any sector tracked. Per the table below, some of the returns, such as Equinix Inc (NASDAQ:EQIX) and Digital Realty Trust Inc (NYSE:DLR), are quite healthy, with the former logging second-highest return and best positive rate of all the stocks tracked. EQIX and DLR both sport year-to-date deficits of more than 10% at last check, so White's data shouldn’t suggest some drastic reversal and instead, perhaps, a stop to the slide.

Best of March COTW

White also compiled a list of the 25 best-performing exchange-traded funds (ETFs) for the month in the last decade. The iShares U.S. Real Estate ETF (NYSEARCA:IYR) sports what at first looks like an uninspiring 0.26% return with a 70% positivity rate. However, compared to the returns from other ETF's, a roughly 0.3% return is rather respectable. For context's sake, red-hot VanEck Vectors Oil Services ETF (NYSEARCA:OIH), up 36% in 2022, averages a -5.9% return in March with only 50% positivity rate.


Don't offer that signal to IYR options traders, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), IYR's 50-day put/call volume ratio of 14.34 ranks five percentage points from an annual high. Not only does this show that puts outnumber calls by a healthy 14-to-one margin, but the high percentile rank indicates the rate of put buying relative to call buying has been quicker than usual. It's not just options traders; short interest has increased by 12.6% in the two most recent reporting periods. The 14.25 million shares sold short accounts nearly 22% of IYR's total available float.

COTW IYR pc ratio

As Russia has barnstormed the global markets, clocked the IYR outflows at $456.9 million last week. While that pales in comparison to the billions of outflows seen from gold or SPY, it still cracked the top 10 list. Market stability, it seems, is just a pipe dream at this point until Ukraine can wear Putin out. There are few other variables to consider if a directional real estate play is of interest. The housing market has been ablaze for over a year right now. A hawkish Fed was supposed to cool things off, but the number and scope of rate hikes is now in questions thanks to Russia's invasion. This quote from Fannie Mae chief economist Doug Duncan stands out: “The Federal Reserve, the world’s largest single investor in mortgage-backed securities (MBS), is slowing its purchases of MBS and plans to stop completely by early March. Subsequently, but without providing supporting detail, the Fed has indicated that it will not reinvest the proceeds of maturing MBS into new MBS.”

Real estate is always complicated, and that's a lot to unpack above. Seasonal signals are facing off with geopolitical headwinds, options traders are loading up on puts, and all of this ahead of a pivotal Fed meeting. Amidst this maelstrom of volatility and uncertainty, it bears reminding that using options limits your capital at risk compared to stock trading, while pairing two diametrically opposed directional plays within the same sector provides a built-in "hedge" against macro headwinds while simultaneously creating multiple possible paths to profit.


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