REIT Index Total Returns for 2003

CHARLOTTESVILLE, VA — REITs delivered their highest total returns in over 12 years in 2003, outperforming the S&P 500 for the third year in a row.

The SNL Equity REIT Index returned a total of 37.5%, which far outstrips the index's 4.0% for 2002 and beats its 1996 total return of 35.9%, previously its best annual return. On a price-only basis, the SNL Equity REIT Index also beat the S&P 500 Index, appreciating 28.8% in 2003 versus the S&P's 26.4% rise. However, the Russell 2000 Index outperformed the SNL Equity REIT Index, returning a total of 47.3%.

Despite real estate fundamentals that were generally scraping along the bottom, investors were consistently bullish on REITs through 2003. Fund flows buoyed share prices all year long as investors continued to chase yield. The average yield on the SNL Equity REIT Index at the end of 2003 was 5.8%, down from 7.4% a year ago. Yet REIT yields remain compelling in the current low interest rate environment.

Among individual property sectors, health care REITs delivered the strongest returns, with an index total return of 56.0%. Aside from generally improving investor sentiment regarding the sector, which had been pummeled in recent years by uncertainties surrounding Medicare payment structures, outstanding problems at several companies were resolved, boosting returns into the triple digits in some cases.

Retail REITs, led by the enclosed malls, continued to demonstrate strength this year as they had in 2002. The SNL Retail REIT Index returned a total of 47.5% and the Enclosed Mall REIT Index returned a total of 53.5%. Although there were occasional worries about consumer confidence, retail fundamentals remained solid throughout the year.

Even the slowest property sectors showed vigor. Multifamily REITs returned a total of 25.6%, compared to a decline of 5.8% in 2002. Similarly, office REITs returned a total of 33.4%, compared to a decline of 4.2% last year. Such returns tend to reflect fund flows into REITs as a whole rather than perceptions of imminent improvement in property fundamentals in these sectors.

According to Keith Pomroy, Senior Analyst and Editor--Real Estate at SNL Financial LC, investors are likely to continue seeking the perceived safety of REIT returns in the early part of the year. At the same time, Pomroy said, "There is now concern about REIT valuations in some quarters."

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