REITs – nearing an inflection point
After lagging equities the past two years, REITs offer an attractive investment opportunity in 2024.
The headwind of higher bond yields and central bank rate hikes is likely to abate and may turn into a tailwind if our view about an impending economic slowdown and decelerating inflation trends is correct.
Peaking or falling yields have historically been a catalyst for strong REIT market outperformance.
With durable and visible cashflows from staggered lease renewals phased over multiple years, REITs provide defensiveness against sharp earnings declines as the economy slows. The prospect of lower interest rates is an additional tailwind for this capital intensive, longer duration market.
Clear evidence of a growth slowdown and moderating inflation has increased our conviction that global central banks are nearing the point of peak rates and will need to start cutting by mid 2024.
Wage growth and the American consumer showed more meaningful signs of deceleration in Q4 ‘23. In Europe, economic surprise indices have been in negative territory since May 2023, while China appears to be flirting with deflation.
REITs screen cheap relative to public equities, trading at EV/EBITDA multiple spreads over one standard deviation away from long-term averages.
The discount against public equities compares to levels seen during the global financial crisis (GFC).
Public REITs also look like good value against private real estate.
U.S. REIT share prices are implying meaningful cap rate expansion versus private real estate across major sectors.
Property sectors with resilient, structurally-driven demand dominate REIT markets and should hold up better during a recession.
These sectors address the demands of a changing economy and society and offer attractive long-term growth. We prefer sectors with such defensive growth attributes.