REITs may not stand up well to a bear market, according to the Heitman/PRA REIT Sheet, a monthly industry report.
REITs were not a good place to be in the 1973-'74 bear market, according to the report. And while REITs outperformed the S&P 500 index in the bear markets of 1977-'78 and 1983-'84, it's not clear whether they would fare better than the index in a future correction.
Historically, REITs have tended to move closely in line with the Russell 2000 index, given REITs are by and large small-capitalization stocks. Based on Heitman/PRA and Wilshire Associates data, the rolling four-year correlations between the Russell 2000 and Wilshire REIT index were 0.92% for 1991 and 1992 periods ended Sept. 30. But in recent years, the correlation has slipped to 0.26% in the rolling four years through Sept. 30, 1996.
The report says the real downside cushion is the dividend yield of REITs, now at 6.55%, more than half a percentage point above that of the Dow Jones utility index.