Here's a question that should make every residential REIT investor angry: If housing prices nearly doubled over the past decade, why are residential REIT shareholders barely breaking even?
A Reddit user just laid out the numbers, and they're damning. According to FRED's housing price index, home values have almost doubled since 2016. Meanwhile, major residential REITs have been a disaster: UDR up only 5%, ESS up 15%, EQR down 20%, AVB up 5%.
Think about that. If you'd bought a rental property in 2016 with even a modest 4% cap rate, you would have collected 4% annually in rent and seen massive capital appreciation. REIT investors got the income but none of the gains. What gives?
The question exposes something Wall Street doesn't like to talk about: Professional management doesn't always mean better returns. In fact, for residential REITs, it often means worse returns once you account for management fees, overhead, and empire-building acquisitions.
Here's what happened. Individual landlords who bought properties in 2016 kept it simple: collect rent, maintain the property, benefit from appreciation. REIT managers, on the other hand, got paid to do things - acquire properties, develop new projects, issue debt, buy back shares, expand into new markets.
All that activity created fees and compensation for executives. It didn't necessarily create value for shareholders.
Why REIT share prices don't track housing values
The disconnect comes down to a few factors:
1. Overhead costs: REITs have corporate offices, executive teams, investor relations, compliance departments. Your neighbor who owns three rental houses doesn't. That overhead eats into returns.
2. Empire building: REIT managers are incentivized to grow assets under management, not maximize per-share value. Buying properties at peak prices to hit growth targets destroys value, but it increases executive compensation tied to company size.
3. Debt and dilution: Many REITs issued shares or took on debt to fund acquisitions during the run-up. If they overpaid for properties (easy to do when you're spending other people's money), that dilutes existing shareholders.
4. Market sentiment: When interest rates rise, income-focused investments like REITs get sold off as bonds become competitive. Individual property owners don't face daily mark-to-market pricing - REIT investors do.
The dirty secret is that residential REITs were supposed to offer professional management and diversification benefits that justify their existence. But if they can't capture housing appreciation in a decade-long bull market, what exactly are investors paying for?
What this means for you
If you own residential REITs for income, fine - you're probably collecting decent dividends. But don't kid yourself that you're getting real estate appreciation. You're getting whatever's left after management takes their cut.
The broader lesson: "Professionally managed" doesn't mean better. Sometimes the simplest approach - buy good assets, hold them, collect cash flow - beats the fancy financial engineering that pays executives millions.
If you can't explain why a REIT should outperform direct property ownership, you're probably just paying for someone else's compensation package.
