Real Assets
Green Shoots for Global Listed Real Estate
Article
Aug 16, 2024
Growth fears sparked a global stock market rout earlier this month. Weaker-than-expected U.S. employment data contributed to concerns that the U.S. Federal Reserve will cut rates too late to achieve a soft landing, triggering an equity market sell-off. Global listed real estate, however, has displayed relative strength amid the recent volatility, following years of underperformance—and we expect this trend will continue.
We believe global listed real estate is well positioned to produce compelling risk-adjusted returns relative to broader equities, given the green shoots we see emerging for the asset class. These include a normalizing interest rate environment, a more favorable fundamental backdrop, and attractive valuations.
- Interest Rates Trending Lower: With the Fed signaling it will cut interest rates as soon as September, the end of the Fed tightening cycle is easing pressure on real estate investment trust (REIT) valuations. We find that global REITs have historically exhibited positive performance relative to global equities following interest rate peaks. In addition, our research shows that the inverse relationship between REIT returns and 10-year U.S. Treasury yields has grown stronger in recent years, implying that the easing of restrictive monetary policy and falling interest rates should be supportive for REIT returns going forward.
- Favorable Fundamentals: Supply-and-demand fundamentals remain supportive of moderate net operating income growth across most property types, in our view. We believe supply pressures within the U.S. residential sector have improved, while increasing mobility should benefit self-storage landlords. We see a robust growth story for senior housing within health care, and artificial intelligence is a huge potential driver for the data center sector. Overall, the decline in property values globally over the last couple of years appears to be bottoming. We believe stabilizing property values should lead to increased transaction activity: REITs have historically experienced outsized acquisition volume following periods of troughs in the values of underlying real estate assets.
- Attractive Valuations: Despite their recent outperformance, global REITs are currently trading at a roughly 6% discount to net asset values, in line with the historical average. Meanwhile, many global markets and individual sectors continue to trade below long-term averages relative to net asset values. REITs also trade near the cheapest valuation relative to global equities that we have seen in decades. The broad market appears expensive, but global REITs do not.
We believe that listed REITs play an important role in portfolios no matter the market environment. They offer potential portfolio benefits including income generation, diversification, and comprehensive exposure to property types and geographies. Their liquidity profile also enables investors to tactically adjust exposures at opportune times when green shoots are appearing—times like now.
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