Mispriced and overlooked, global real estate may be next to run

The last time global real estate investment trusts (GREITs) lagged global equities by as much as they do now, Australia was over-excited about One.Tel and living rooms crackled to the sound of dial-up internet.

The dotcom bubble had left REITs for dead. Then the bubble burst and REITs did what neglected asset classes tend to do when normality returns; they bounced back.

The chart below (left) shows the US NASDAQ index between 1990 and 1999 outperforming global REITs, while the chart to the right shows their resurrection.

NASDDAQ vs. Global REITs leading into the Dot-com Bubble

NASDDAQ vs. Global REITs after the Dot-com Bubble

Today’s circumstances aren’t identical but the echoes are audible. Global REITs have now underperformed global equities for four consecutive years, the longest period in over two decades.

Unlike in the Dotcom era and the pandemic, recent pessimism has accumulated slowly. The effect, however, has been the same. Relative to equities, on key valuation measures GREITs are trading significantly below historical averages.

The purported impacts of artificial intelligence (AI) at one end of global markets has created some speculative excess. At the other, in commercial property, there are ongoing macroeconomic concerns, compounded by the shift to work-from-home, white-collar employment and cost-of-living pressures.

The result is that GREITs have been all but forgotten. Relative valuations have plumbed levels not reached in decades.

Price / Book value

Global Listed Real Estate vs Equities

Price / Cash Flow

Global Listed Real Estate vs Equities

For an active investment strategy like the Dexus Global REIT Fund, where investment decisions are based on data more so than narrative, this is a time of opportunity.

The evidence is compelling. GREIT earnings rebounded strongly after the pandemic and have actually exceeded economic growth after conditions normalised. While the returns in the chart below suggest some volatility, they do not substantiate the discounts implied by public market pricing. Indeed, earnings growth shows increasing momentum, in our view.

Historical global real estate sector earnings growth vs. GDP growth*

There are other reasons for investors to be enthusiastic

First, commercial property is primarily an investment in an income stream. Leases are contractual and long-term, rents typically rise with or ahead of inflation and revenue is reliable. GREITs are classically defensive assets, with growth potential.

Due to booming equity markets, many investors are now underweight real estate. This is an opportune time for investors to rebalance their portfolios, lock in some gains and increase their exposure to GREITs, in our view.

Second, these defensive characteristics are available at compelling prices. We believe GREITs might be well positioned to outperform equities, offering dividend yield, earnings growth and valuation upside.

On a risk‑adjusted basis, low‑teens returns may be a realistic expectation, although as we’ll explain in part two, not all GREITs are created equal.

Third, the strength of the investment case is unlikely to be undone but expanding supply. Construction and financing costs are now higher and projects have been delayed or shelved. Implications of this dynamic is likely to be ongoing market rental tension, benefiting incumbent REIT landlords.

According to JLL forecasts, across office, industrial, retail and other sectors, completions in 2026 will be lower than in the 2021–25 peak. Supply is tightening, not expanding. That’s good for GREIT earnings growth.

Fourth, private market transactions support valuations and prospective earnings growth. Private buyers, deploying real capital, tend to be more pragmatic than investors in listed markets. The recent increase in mergers and acquisition activity bolsters the investment case.

There are other reasons for investors to be enthusiastic.

Direct commercial real estate transaction volumes ($bn)

Fifth, inflation and interest rates are moving into more favourable territory. Historically, GREIT returns have been strongest when inflation is in a 2–3 per cent band.

Current running yields for global REIT portfolios are in the mid-single digits. The Dexus Global REIT Fund, for example, offers a current running yield of 3.72%.

Let’s say that dividend yields contribute 3–5 per cent and earnings grow at mid-single digits, too. Even if GREIT share prices stay exactly where they are, this would imply returns in the high single digits.

However, it’s quite possible the valuation discount closes over the next few years – we can’t say when exactly, but that’s usually what happens. Add these factors together and low-teens total returns are plausible, especially on a risk-adjusted basis.

For investors seeking a more defensive posture without sacrificing the potential for total returns, this is an ideal time. That’s why we believe global listed property looks less like a relic and more like a mispriced opportunity hiding in plain sight. In part two, we’ll explain exactly where to look.

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