Real Estate
Global Real Estate Securities: Market Observations on a Volatile Start to 2022
Article
Feb 16, 2022
Here in early 2022 the markets have exhibited elevated volatility stemming from concerns around tighter monetary policy in the U.S., ongoing impacts from the COVID-19 Omicron variant and persistently elevated inflation over the past few quarters.
While interest rates may be on a trajectory higher from all-time lows, we don’t believe they will march meaningfully higher in the near term. Additionally, higher inflation has sparked the debate as to how long higher prices will last. We do not foresee a scenario in which inflation remains elevated, as supply chain pressures should be resolved in coming months.
In our view, the overall REIT market is now more attractively priced on an absolute basis following the sharp reset in equity prices. Additionally, some sectors that were more impacted in the short term from the market selloff created some attractive relative-value opportunities.
Herein we highlight observations across select regions and property types related to recent market dislocations.
Sector / property type | Observations |
---|---|
J-REITs (Industrial) | Fundamentals: Vacancy rates remain low, despite an increase in new supply. Pre-leasing commitments—not just from logistics companies, but also from retailers and manufacturers—are driving net absorption.1 We think the industrial sector will experience some of the best rent growth relative to other REITs in the country. Valuations: Market volatility early in the year resulted in a selloff that we believe was driven mostly by technical factors, rather than a change to fundamentals. Outlook: Prior to the recent volatility, our view was that many J-REIT sectors, such as industrial, were overpriced relative to other global opportunities, despite positive fundamentals. The pullback has created more attractive buying opportunities. |
German Residential | Fundamentals: German residential property prices have risen 12.6% over the past year, outpacing rental rate increases.2 We think rent growth will remain solid and cap rates will move lower. Valuations: German residential equity prices are down meaningfully over the past 12 months, primarily driven by fears of higher rates. Outlook: We do not believe higher rates will have a significant negative impact on net asset values (NAVs); and the decline in recent quarters has resulted in stocks trading at attractive discounts to NAVs. |
Reopening Sectors (Global Hotels) | Fundamentals: Overall U.S. revenue per available room (RevPAR) is estimated to have surpassed 2019 levels in December 2021. Demand has been driven by leisure demand, but destinations dependent on business travel and international tourism still have significant room to recover.3 While the presence of the Omicron variant differs across regions, we remain optimistic about mobility trends—particularly regarding the resumption of business travel, conferences and international travel. Valuations: REITs experienced a rotation from “growth” to “value” sectors in January. Although returns have been slightly negative this year, hotels have outperformed the REIT market during the recent selloff. We believe attractive valuation has contributed to the relative outperformance. Outlook: Despite the relative outperformance of hotels, we think these beaten-down sectors have room to move higher as the global reopening unfolds. |
Conclusion
Despite the near-term market volatility, we do not believe the fundamental outlook for real estate over the next 12-24 months has meaningfully changed. The pullback in many sectors has created opportunities to buy high-quality companies at more attractive prices. We have taken advantage of dislocations to position our portfolios where we see the most attractive long-term opportunities at the most attractive valuations.
1 Source: CBRE “Japan Logistics MarketView Q4 2021.”
2 Source: Bloomberg, Bank for International Settlements
3 Source: Smith Travel Research, Brookfield Research
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Brookfield Public Securities Group LLC (“PSG” or “the Firm”) is an SEC registered investment adviser and is registered as a portfolio manager in each of the provinces and territories of Canada and represents the Public Securities Group of Brookfield Asset Management Inc., providing global listed real assets strategies including real estate equities, infrastructure equities, multi-strategy real asset solutions and real asset debt. PSG manages separate accounts, registered funds and opportunistic strategies for institutional and individual clients, including financial institutions, public and private pension plans, insurance companies, endowments and foundations, sovereign wealth funds and high-net-worth investors. PSG is an indirect, wholly-owned subsidiary of Brookfield Asset Management Inc., a leading global alternative asset manager.
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