Listed property has sunk into doer-upper status over the last few years.
The run-down asset class has weathered reputational damage in the wake of COVID, which left a strew of wreckage in the global office market including the ruins of high-profile collapsed shared-space star, WeWork.
And the tough times for the listed Real Estate Investment Trust (REIT) sector clearly show up in recent ramshackle performance figures, as presented by Matt Pace, Cohen & Steers head of global relationship management, to NZ investors last week with Salt Funds.
The global REIT index returned just under zero on average over the last five years with the US market (up 4 per cent annualised) the only region in positive territory for the period.
Despite strong returns in 2021 (US REITS surged more than 40 per cent) and 2023, the interest-rate sensitive asset class has taken a hit again in the first quarter of this year as central banks signal a longer holding pattern.
But while low valuations offer an “attractive entry point” for bargain-hunters, Pace said the index also obscures a wide dispersion of returns between countries and sectors that provide alpha-generating opportunities for active managers.
“Active management is the best way to approach REITs in what is an inherently inefficient asset class,” he said.
Research commissioned this year by the global listed property industry body, Nareit – and carried out by CEM Benchmarking – found that after fees “actively managed REIT portfolios generated a value-added return of 0.32%” from 1998 to the end of 2021: private real estate was down almost -0.7 per cent after fees relative to the index over the same period, according to the study.
Since a 1960 legislative change in the US enabled REITs to launch, the sector evolved through various phases there before taking off in other jurisdictions (NZ and Australia were early-adopters).
Nareit data counts 940 REITs across the world today with a combined valuation of US$2 trillion (including US$1.2 trillion in US-listed stocks).
The FTSE Nareit US index represents about 190 REITs with 28 of those in the S&P 500.
Furthermore, the REIT universe is now divided into 14 sectors with traditional office space a shrinkingly small corner of the market.
“At the end of April this year, office made up 3.7 per cent of the index,” Pace said. “Our exposure is about 0.5 per cent.”
He said Cohen & Steers is weighted to out-of-office opportunities in rental growth markets such as data centres, ‘single family for rent’ residential as well as European retail and logistics.
“There’s alpha in sectors with new and attractive valuations,” Pace said.
While REITs have moved beyond the office into a diversified range of spaces that mirror the modern economy, he said the attraction of real estate for investors remains the same.
“Property provides that total return of income plus price appreciation,” he said.
Cohen & Steers is the oldest and largest global REIT investor with US$50 billion plus under management in property assets and 22 investment specialists in the asset class. The firm is the underlying manager for the Salt global diversified funds in both REITs and listed infrastructure.