REITs Revisited: A Closer Look at Tax Efficiency and Returns

A fresh look at after-tax returns and valuations may cast REITs in a new light.

Real estate investment trusts (REITs) have faced headwinds of late. Over the past two years, the Dow Jones U.S. Select REIT Index has underperformed the S&P 500 by nearly 35 percentage points as rising interest rates, moderating operating fundamentals, middling earnings growth and late-cycle fears tested the sector.

While some of this underperformance may be warranted, we believe current valuations on REITs are attractive relative to the broader equity markets based on our multi-asset real return framework. Moreover, while all investments carry risk, we see a number of factors supporting REITs today, including discounted valuations (relative to where the underlying assets would likely trade in the private commercial real estate transaction market), steady and predictable cash flows and still-rising and well-covered dividends, along with moderating growth in new supply and continued healthy tenant demand. The recent U.S. tax reform offers another key support, and we believe it is helping level the playing field with corporate equities in terms of after-tax returns to individual investors.

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Ray Huang

Portfolio Manager, Real Estate

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Past performance is not a guarantee or a reliable indicator of future results.

REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. All investments contain risk and may lose value.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

The Dow Jones U.S. Select Real Estate Investment Trust (REIT) Index is an unmanaged index subset of the Dow Jones Americas U.S. Select Real Estate Securities (RESI) Index. This index is a market capitalization weighted index of publicly traded Real Estate Investment Trusts (REITs) and only includes only REITs and REIT-like securities. Green Street Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. Features that differentiate this index are its timeliness, its emphasis on high-quality properties, and its ability to capture changes in the aggregate value of the commercial property sector. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.