REITs are recovering.

Why the outperformance relative to equities may continue.

After a challenging 2022 for REITs, headwinds have begun to fade, and we may now be entering a more favorable environment for REIT investing.

Explore our latest insights

Capture the outperformance potential of REITs

The Fed tightening and rising yields cycle has entered the late innings—a catalyst for REIT stocks. With relatively defensive, stable earnings growth and compelling relative valuations, it could be an opportune time for a meaningful allocation to REITs in today’s slowing macro environment. Here are four reasons why we see potential REIT outperformance relative to equities going forward:

1. Most importantly, the headwind of rising real yields is likely fading.

With REITs exhibiting higher duration and rate sensitivity, rising real yields at the long end of the yield curve was the driver for the big sell-off of REITs in 2022. Since October, we have been at a potential inflection point of peaking real yields—a catalyst for REIT outperformance historically and recently.

Global REITs historically deliver strong absolute and relative returns after yields* peak

Bar graph showing total returns and excess returns of global REITs after yields peak

Disclosure

As of 31 January 2023. Source: FactSet. Returns data is showing FTSE EPRA/NAREIT Developed Index (global REITs) average annualized total and excess returns over the MSCI World Index (global equities), respectively, after the last 7 periods of rising real yields have peaked (an increase of at least 75 bps *represented by the US 10-year TIPS). The latest period after real yields peaked is 30 September 2022 is broken out separately and is less than a 12-month period. Analysis goes back to January 1997, the inception of U.S. TIPS bond market. Past performance does not guarantee future results. Indices are unmanaged and do not take into account fees, expenses, and transaction costs and it is not possible to invest in an index.

2. U.S. listed REITs have historically outperformed equities when the economy slows.

The economic slowdown we are in today is often the right time to own REITs based on historical performance, as exhibited by the U.S. market. During this period of weak growth, the defensive and durable income streams of REITs can look attractive.

Case study example:
U.S. REITs have outperformed equities on average since 1990

Bar graph of annualized REITs returns during different economic cycles outperforming U.S. equities since 1990
U.S. REITs
U.S. equities

Disclosure

As of 31 January 2023. Source: The Conference Board Leading Economic Index (LEI), National Bureau of Economic Research (NBER), FactSet. LEI and NBER were utilized to identify business cycle phases since 1990. Returns data is showing average annualized returns that occurred from the FTSE NAREIT Equity REITS (U.S. REITs) and S&P 500 (U.S. equities) indices during each phase. Past performance does not guarantee future results. Indices are unmanaged and do not take into account fees, expenses, and transaction costs and it is not possible to invest in an index.

3. Every recession is different—REIT returns during recessions have been too.

The last two U.S. recessions had an outsized impact on REITs for unique reasons, but in prior recessions REITs performed well. Today, REITs are entering a potential recession with support from reasonable valuations, healthy balance sheets, and many sectors with structural demand tailwinds, plus low supply conditions.

Case study example using U.S. REITs:
No two recessions are the same

Bar graph of U.S. REITs average annualized returns compared to U.S. equities during different recessions
U.S. REITs
U.S. equities

Disclosure

As of 31 January 2023. Source: National Bureau of Economic Research (NBER), FactSet. NBER was utilized to identify past recessions since 1990. Returns data is showing average annualized returns realized during these recession periods from the FTSE NAREIT Equity REITS (U.S. REITs) and S&P 500 (U.S. equities) indices. Past performance does not guarantee future results. Indices are unmanaged and do not take into account fees, expenses, and transaction costs and it is not possible to invest in an index.

4. Finally, we believe listed REITs are a bargain compared to general equities.

Public REIT markets have repriced for higher yields and tighter financial conditions. Given the underperformance for the past year, REITs are looking historically cheap relative to equities – with price multiple spreads a full one standard deviation away from the median.

Global REITs are trading at significant discounts to equities

EV/EBITDA spreads (REIT minus equities)

Line graph demonstrating the discounted trading value of global REITs compared to equities

Disclosure

As of 31 January 2023. Source: FactSet. EV (Enterprise Value) to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) price multiples are used to measure valuations. The spread plotted is the EV/EBITDA of FTSE EPRA/NAREIT Developed Index minus the EV/EBITDA of the MSCI World index. Expensive and cheap valuations are represented by spreads higher or lower than one standard deviation from the mean, respectively. Fair value is represented by valuations between one standard deviation from the mean.

Adding public REITs to a portfolio may offer several benefits

Illustration depicting an upward pointing line graph

Brings in potential for compelling total returns while providing liquidity

  • Delivered total returns higher than global equities and bonds since 20011
  • More liquid than direct ownership of property and provides immediate exposure to real estate
Illustration that depicts a hand holding a dollar sign

Offers potential for income and inflation protection

  • REIT dividends may provide a source of durable, growing income that is tied to physical real estate assets and contractual leases
  • Historically REITs provide resilient returns through periods of higher inflation2
Abstract illustration conveying a portfolio with diversification

Adds multiple diversification benefits in an investor's portfolio

  • Broad diversification by geographies and property sectors
  • Low correlation to other asset classes
  • Complementary to a private real estate allocation

Investing in REITs with Principal Real Estate

Our REIT team has a strong track record of delivering attractive risk-adjusted excess returns for our investors.

Proven, experienced, and consistent portfolio management

  • Top 5 largest manager of REIT securities3
  • More than 25 years of REIT investment experience across multiple market cycles
  • Strong, stable leadership and philosophy
  • Dedicated team of REIT specialists

Active management matters

  • As a top 10 global real estate manager4 investing across public and private equity debt, we can leverage our 360° view of real estate markets
  • As dedicated active REIT managers, we have the necessary knowledge and REIT-centric investment approach to scrutinize and exploit the market's inefficiencies to potentially enhance returns
  • Our portfolios are constructed to provide strong excess returns with an optimal level of risk

Disciplined stock selection process focused on quality at the right price

  • Bottom-up strategy – we believe over the long-term, higher quality companies tend to deliver above-average growth—not just earnings—but also in terms of value added to shareholders
  • Diversifying across a large number of medium-sized active weight positions has helped enhance portfolio returns and hedge on the downside over time

We think the time is now to consider adding a meaningful allocation to REITs and optimize your portfolio.

We can help

Reach out to a Principal Asset Management representative today for more information.

Resources

Citations

1 Source: Morningstar. As of 31 December 2022. Annualized total returns between 1 January 2001 and 31 December 2022.

2 Source: FactSet, U.S. Bureau of Labor Statistics. As of 31 December 2022. Over 12-month time periods from 1 January 2000 to 31 December 2022, Global REITs outperformed global equities (13% vs 8%) when inflation (CPI) was above average (>2.51%). Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index.

3 Managers ranked by worldwide REIT assets as of 30 June 2022. “The largest managers of REIT assets” Pensions & Investments, 3 October 2022.

4 Managers ranked by total worldwide real estate assets (net of leverage, including contributions committed or received, but not yet invested; REOCs are included with equity; REIT securities are excluded), as of 30 June 2022. “The Largest Real Estate Investment Managers,” Pensions & Investments, 3 October 2022.
Disclosure

Past performance is no guarantee of future results. 

Real estate investment options are subject to some risks inherent in real estate and real estate investment trusts (REITs), such as risks associated with general and local economic conditions. Investing in REITs involves special risks, including interest rate fluctuation, credit risks, and liquidity risks, including interest conditions on real estate values and occupancy rates. International investing involves increased risks due to currency fluctuations, political or social instability, and differences in accounting standards.

Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.

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