Real estate rebound

As interest rates hover at historic low levels, investors are being starved of income from traditional fixed income sources. Investors are taking on more risk and are moving to real estate investment trusts (REITs) for their reliable income. Savvy investors are looking beyond Australian shores to seek opportunities not readily available in Australia.

While the US remains the largest listed real estate market, the opportunity is increasingly becoming global. Today, nearly 40 countries offer REITs, according to Nareit, the worldwide group representing REITs and publicly traded real estate companies.[1]

Global real estate stocks are on the rise. The broad sector, as represented by FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged, has gained 17.45% for the first half of 2021, more than the 9.94% return of the local S&P/ASX 200 A-REIT Index.

The recent wave of exuberance in global real estate stocks stands in contrast to Australia which now finds itself in the grip of new lockdowns. The sector last year slumped as the pandemic closed shops and restaurants and prompted a shift to working from home which undermined the outlook for office buildings.

In the rest of the world, the rollout of vaccinations, particularly in the US and Europe, has allowed their economies to open more fully, boosting real estate stocks that had borne the brunt of the lockdowns. Against this backdrop of greater optimism, investor sentiment towards property has improved.

With market participants expecting continued low rates and a low growth environment as the global economy emerges from this crisis, now could be the time to set your client’s portfolio to rebuild and allocate a portion to listed international real estate securities.

Trending higher

Global real estate equities languished in the throes of the pandemic early last year, when restrictive lockdowns shut malls, offices and hotels. Since then, the broader market, as represented by the FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged, has climbed steadily. This contrasts to the Australian index, which has been held back by a new wave of lockdowns and uncertain economic outlook.

Although the global pandemic situation remains fluid, many investors are considering global real estate for their listed property allocation. With the pace of global economic recovery picking up on the back of effective vaccine rollouts, the outlook for the sector looks promising. Morgan Stanley predicts a strong rebound in the real estate sector this year, just like in 2004 when growth and inflation moved higher.

Global industrial and logistics assets are expected to lead the upturn as the world’s property markets recover over the next few years. The pandemic has accelerated the adoption of e-commerce. Data has grown exponentially too, given the higher adoption of ecommerce, business digital transformation and penetration of smart buildings. Use of 5G technologies, artificial intelligence and internet of things technologies will further accelerate this growth.

Diversification is key

Global REITs offer real estate investment opportunities not readily available in Australia, including lodging/resorts, healthcare, self-storage and data centres.

Investment opportunity

With markets expecting interest rates to rise, real estate equities can be an ideal hedge against inflation because of their pricing power. Some leases are tied to inflation and many tenants bear rent hikes to avoid the cost of moving.

Meanwhile, lacklustre bond yields make the real estate sector’s dividend payments more appealing; these securities historically paid higher dividend yields than other equity classes, offering an alternative source of potential income.

The low correlation between real estate and traditional bond and equity markets also makes investing in the sector a good diversification. Investing in a global real estate ETF can help investors diversify without buying actual property. Investors gain exposure to many different countries, sectors and real estate assets through one trade on the ASX; such diversification and liquidity is not easily replicated in other forms of real estate ownership.

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[1] Nareit, (VIEW LINK)