Real Assets

The Truth About Listed REIT Valuations

Article

Feb 11, 2021

Listed real estate equities have rallied in recent months and now seem to appear fairly valued based on aggregate valuation measures. As a result, some investors are questioning whether there is still value to be found in the asset class. Our take: merely looking at overall metrics may mask a great opportunity in certain real estate sectors.

U.S. real estate investment trusts (REITs) are currently trading at a 2.7% premium to net asset value (NAV), in line with historical averages. The chart below takes a deeper dive into this data, revealing how the overall metric has been propped up by the outperformance of data center and industrial stocks. These two sectors have benefited from near-term tailwinds directly related to the COVID-19 pandemic and social distancing requirements, including the increase in remote working, online learning and e-commerce. They are now trading at premiums to their historical valuation averages, and their strong performance has given them an outsize impact on overall index data.

Sectors most impacted by social distancing are trending at notable discounts

In contrast, sectors whose cash flows are most sensitive to social distancing requirements, namely retail, hotels and office stocks, are now trading well below their long-term valuation ranges and at notable discounts to NAVs. These discounts already account for the sectors’ recent moves higher on optimism that life will normalize in 2021. And we believe the discounts may be even more pronounced than they appear. This is because the discounts are relative to current NAVs (estimated private real estate values), which we believe analysts have generally revised too low due to limited recent transaction activity in private markets.

The opportunity we see beneath surface figures is twofold: We believe listed markets are undervaluing many companies in the beaten-down sectors vs. current NAVs. We also expect private market values to be revised upward over time as cash flows stabilize and transaction activity resumes, making today’s discounts look even steeper. An active approach that identifies the most attractively valued companies likely to benefit as social distancing measures are relaxed and economies recover is key for capturing this opportunity, in our view. Read more on our views in the full commentary.

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Disclosure Information

This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All information is current as of the date of this material. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.