There are several top industry indices for REITs. One of them, the S&P United States REIT Index (STCGUSRE, pictured above), defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the US. Another, FTSE All Equity REIT Index, FNER-FTX, is a free-float adjusted, market cap-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages collateralized by real property.

Stymied by an economy plagued with a high rate of inflation and rising interest rates, publicly-traded REITs have been struggling for much of 2022 YTD, with the latter, FTSE All Equity REIT Index, posing a drop of more than 30% at its lowest point this year. But the news are gradually improving lately. November marked the 2nd straight month of gains, with the total returns for the index up 5.77 percent. As a result, REITs have clawed back some losses and the index is now down 20.27 percent.

For the month, nearly every property sector posted gains with data centers leading the way (up almost 19%). Healthcare REITs also posted a double-digit gain and total returns were up 11% for the month.

Having said that, The Bank of International Settlements, BIS, recently issued an array of warnings in its latest quarterly report, saying that there are emerging signs of fragility in the markets for agency mortgage-backed securities, MBS, in the U.S. First of all, as MBS trading volumes declined in 2022, their yield spreads over US Treasuries became unusually volatile compared with those over the past 35 years.

An underlying shift is occurring in this niche as a whole. Small investors and leveraged funds have become the main buyers, and they have been traditionally providing less liquidity than banks in times of stress. At the same time, monetary policy priorities may make it challenging for the Federal Reserve to backstop the MBS market, should the need arise. In this environment, surges in selling pressure could be particularly disruptive.

Among key market participants, closed-end funds known as mortgage real estate investment trusts (mREITs) are relatively prone to selling rapidly in times of stress. Large amounts of debt – often in the form of short-term repos – allow mREITs to pay out double-digit yields, even if they mostly invest in low-risk securities. High leverage and maturity mismatches imply that mREITs can be an important source of fire sales, even though they hold a small share of MBS outstanding (between 1.5% and 5% over the past 10 years).