Amid growing doom-and-gloom reports on the state of the commercial property market, US-headquartered listed real assets specialist, Cohen & Steers is looking on the bright side.
In a recent presentation, Rich Hill, Cohen & Steers, head of real estate strategy and research, said the listed real estate market is poised for a turnaround with interest rates likely at (or near) a peak, valuations at multi-year lows and a “contrarian signal” flashing from the private property sector.
Hill said the performance gap between the unlisted and listed real estate investment trust (REIT) markets in the US widened to historically unusual levels over the six months to the end of March this year.
He said the listed REIT benchmark climbed over those two quarters while the standard unlisted commercial property benchmark plunged on downbeat valuations.
“… we have long argued that listed REITs are a leading indicator for the private market,” Hill said, noting the listed-unlisted divergence over the six-month period was “very textbook”.
During the period listed REITs beat the private property index “by more than 10 percentage points”, he said.
“That’s a big move. And mind you, for REITs being up for two quarters and the [unlisted property] index being down for two quarters that typically doesn’t occur.”
And the pessimism infecting the private commercial property market saw the index dip by 5 per cent in the December quarter and 3 per cent over the following three months – both among the top five quarterly declines since 1978.
REITs have never recorded a negative 12-month performance in the wake of the 10 previous biggest quarterly drops in the private market index, Hill said.
Nonetheless, the global commercial property market – especially the office sector – has felt the heat recently amid concerns of a looming recession burning over-leveraged building owners.
For example, US publication, The Street, reported earlier in June that: “Commercial real estate has been the focal point of industry watchers looking for a tipping point as the US economy teeters on the edge of a recession.
“And for good reason, the FTSE Nareit index of office REITs (real estate investment trusts) has slumped 44% over the last 12 months, more than any other REIT sector that Nareit publishes.”
But Hill said such worries were overblown given the office sector only represents about 3.5 per cent of the total US listed property market cap while the average loan-to-value of REITs sits at 35 per cent with 86 per cent of loans fixed out to six years.
Despite the positive fundamentals and enticing technical indicators, he said there is still one shoe to drop before the listed property market recovers.
“… we think REITs look attractive relative to themselves. And they look as attractive as they have to the IG corporate bond market in a long time,” Hill said. “But we do think they still look a little expensive relative to the real estate debt markets. So one of the key catalysts we’re looking for the near term is stabilization of real estate debt markets, or maybe even tightening in real estate debt spreads. We think as this occurs, REITs will begin to rally again.”
Cohen & Steers manages listed real estate and infrastructure for institutional investors including via Salt Funds Management and Russell Investments in NZ.
Salt appointed Cohen & Steers to run the global listed property and infrastructure assets of its then new international equity funds in 2021.