Investors Favoring Healthcare REIT Sector, Up 80%, Fitch Affirms Outlook

The healthcare REIT sector is drawing favorable attention from investors, with substantially higher index growth compared to the overall REIT index and continued growth expected. 

The REIT industry in general has a favorable outlook, and the S&P Dow Jones Indices announced on Monday the launch of the Dow Jones U.S. Select Equal Weight REIT Index, designed to serve as a proxy for direct real estate investment by measuring the performance of publicly traded REITs and REIT-like securities. 

“REIT performance has been good, and over time, healthcare REITs have become a more important component of the overall REIT industry,” says Michael Orzano, associate director of global equity indices at S&P Dow Jones Indices.

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At the end of 2007, the healthcare sector represented 9.5% of the DJ US Select REIT Index. Today, it represents nearly 16%, he says, and a lot of that growth has been driven by performance. “Healthcare has been the best-performing sector over the past five years,” Orzano says. “The S&P Healthcare REIT sector index is up about 80% [during that timeframe], compared to the broader S&P US REIT Index that’s up 30%.”

The new index is a subset of the Dow Jones U.S. Select Real Estate Securities Index, constituents of which must be both an equity owner and operator of commercial and/or residential real estate. Additionally, at least 75% of the company’s total revenue must be derived from the ownership and operation of real estate assets. 

“The launch of this Index is indicative of the investment community’s growing interest in REITs,” Orzano said in a statement about the new index. “Equalweighting is a logical product extension as market participants’ attitudes towards REITs mature and they begin to seek more nuanced products in the asset class.”

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As can be expected, interest is being driven by the low interest rate environment as well as certain sectors’ stability and performance. 

Fitch Ratings recently affirmed its Stable 2013 outlook for the healthcare REIT sector following the National Investment Center (NIC) for the Seniors Housing & Care Industry’s release of senior housing data highlighting a “steady improvement” in industry fundamentals. 

The recently-published fourth quarter data “should lead to continued solid property level cash flow growth in the sector in 2013,” says Fitch. 

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Steady improvement in occupancy along with muted supply of new senior housing units and favorable demographics combine to lend “credence to the significant acquisition volume” in the sector, says the ratings company, naming the recently closed acquisition of Sunrise Senior Living by Health Care REIT as a prime example.

“We’ve seen a lot of interest in REIT investment, particularly in the past year, and it has continued to increase,” he told SHN. “We’ve been launching new REIT indices recently, and that trend seems to be continuing from what I’m seeing.”

Written by Alyssa Gerace