Retail REITs looking pricey as Sears ponders joining mix

Wed Nov 12, 2014 3:52pm EST
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By David Randall

NEW YORK (Reuters) - Sears Holding Corp made a huge splash last week when it said it might spin off hundreds of its stores as a real estate investment trust. But the struggling retailer's move to tap into a surging commercial property market comes as the sector looks increasingly rich.

The temptation is understandable. REITs, those formed around retail properties in particular, have been one of the post-financial crisis stars. The reason: juicy dividends. And, of course, six years of low-interest rate policy from the U.S. Federal Reserve, which have pushed bond yields to historic lows.

The S&P 1500 Retail REIT industry group, which includes the likes of mall and shopping plaza owners Simon Property Group Inc., Macerich Co. and National Retail Properties Inc., delivered a total return of nearly 500 percent since March 2009. That's more than double the return of the wider stock market.

This year alone, the benchmark MSCI U.S. REIT index has surged 26 percent compared with 10 percent for the S&P 500.

Yet, just as Sears Chairman Eddie Lampert considers diving into this game, fund managers and analysts in the sector worry that the best days for publicly traded REITs are now behind them because they are too expensive.

"We're turning over rocks for opportunities, but it's clear that REITs are not cheap," said Joel Beam, manager of the Forward Income Opportunity fund.

Beam is not alone. The average equity income fund now holds 7.8 percent of its portfolio in REITs, according to Lipper, the same percentage as in 2009.


Customers walk into a Sears store at Fair Oaks Mall in Fairfax, Virginia, in this file photo taken January 7, 2010.   REUTERS/Larry Downing/Files