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November 7, 2012

Industrial REITs Dividend Yield Outperforms Core Property Types

By Marisha Clinton, Director, Capital Markets Research, JLL

The quest for potentially higher yield, liquidity and diversification can generally be found in REITs, which continue to be a great play for investors.  For the first nine months of 2012 through Sept. 30, the total return for the FTSE NAREIT All REITs Index was up 17.6 percent and above the 16.4 percent increase for the S&P 500, while the FTSE NAREIT All Equity REITs Index was slightly below the market at 16.1 percent.  An enhancement to REIT total performance, the dividend yield over the same period for the FTSE NAREIT All REITs and FTSE NAREIT All Equity Indices came in at 4.2 percent and 3.3 percent, respectively. This outperformance compares to a 2.2 percent dividend yield for the S&P 500.  When looking at the performance of REITs across specific sectors, the industrial category came out ahead for the nine-month period among the core property types with a total return of 25.5 percent, followed by 23.3 percent for overall retail, 14.1 percent for office and 5.2 percent for apartments.

Capital raising by REITs for 2012 has also been quite strong and has reached a new post-recession high of $54 billion with about a 70/30 split between equity and debt to fund real estate activity.  This amount is ahead of last year’s $51 billion raised, and when it comes to the industrial sector, REITs so far have been the most active buyers and sellers given the attractiveness to the stability of rental flows and values that warehouse and distribution product provide relative to other subtypes. In addition, REIT industrial buyers in the market have remained tightly focused on modern fully leased Class A properties in primary distribution hubs such as Los Angeles, Chicago and even Dallas/Fort Worth and Atlanta (UPS headquarters).  However, as investors are beginning to be priced out of many of the primary markets, they are starting to look at well-located properties in secondary markets such as Miami (given its strong trade connections), Memphis (FedEx headquarters) and other less expensive areas of Columbus and Phoenix.

Overall, for the REITs investor concentrated on the industrial sector, key opportunities should focus on facilities that are attracting the active e-commerce and food & beverage industry tenants, which are expected to bolster rents and values in 2013.  Accordingly, this should help drive further growth in total returns generated by REITs activity within the sector.