There is a historic investment opportunity in the market today

Justin Pica

CBRE Investment Management

Throughout investing history, those with the best information have tended to fare better than the rest. Sure, you need to know what to do with the information. But first and foremost, you need to have it. 

It takes time and energy to develop an information edge, and it takes expertise and skill to exploit it. 

Having built a global asset management business with almost $150 billion of assets under management, CBRE Investment Management has shown that it is capable of both gathering and leveraging information for the benefit of its investors.

CBRE Investment Management is a uniquely positioned investment manager within CBRE Group, specialising in listed real assets. Our position and access at CBRE offer a view into private market activity that is simply unmatched.

This is what sets CBRE Investment Management apart - an ability to leverage CBRE's extensive direct real estate network of brokers, researchers, property managers, appraisers, consultants and lenders to draw unique and timely insights across real assets. Our integrated research platform provides an understanding of capital flows and company fundamentals, which aids our investment decision-making process.

In this wire, I share with you why, in our view, the current global REIT pricing dislocation is a potential opportunity for investors, assess what has been happening in the global REIT market, and explain why we believe global REITS are positioned to outperform. 

An exceptional partnership

Uniting CBRE's position as a long-term real estate specialist in Australia and overseas, with UBS's global expertise and leadership in asset management and client service, has produced an exceptional partnership delivering quality outcomes for investors. Visit the website for more unique insights into global real estate.

Edited transcript below

Hello. My name is Justin Pica. I'm a portfolio manager with CBRE Investment Management. I'm here to talk to you today about the great opportunity to invest in global REITs at a historic discount to private-market values.

Turning to the first slide, UBS is a leader in asset management. CBRE Investment Management is uniquely positioned as an investment manager specialising in listed real assets. Our information advantage is, frankly, our connection to the broader CBRE group and the insights that provide us in our day-to-day research and investments across our portfolios.

This slide gives you a context of the breadth of CBRE group, but what I wanted to depict here was really give you a sense of what it means to us as investment managers day to day. We believe philosophically that the fundamentals we observe in the private real estate markets globally, ultimately drive the performance of public real estate stocks over the medium to long term. This is our information advantage: our ability to access markets and colleagues globally to gather insights across transactions, valuations, leasing and lending, to give us better insights as to what's occurring across markets and allow us to make more informed investment decisions.

So why global REITs, and why are they positioned to outperform? Well, the first thing is that we do think that markets are dislocated, and they are positioned to outperform against the backdrop of decelerating growth, high inflation, and rising economic uncertainty. We're at a historic discount. We're trading at valuations of greater than 20% versus private market values. I'm going to show you a little bit about that as we move through the presentation today. In terms of earnings, it's critically important moving forward. We were actually getting earnings growth out of the global REIT sector this year, and we're expecting growth next year as well, which is positive given the economic uncertainty that's being faced in future. Thirdly, fundamentals and balance sheets are strong and in really good shape.

Just to give you a recap of what's happened year-to-date across markets, it's pretty evident that global REITs have had a challenging year to date. They're down almost 30%, as are most asset classes globally, except for private markets, frankly, which are modestly up year-to-date. This is in the face of significantly rising bond yields in a very short period. We believe the bad news is more than priced into global REITs today.

From a position-of-strength perspective, I'm going to take you to the next slide. I just want to give you some context as to where we're positioned globally from a REIT perspective. The REITs are actually in very good shape, so what I should say is that many of the balance-sheet lessons that were learned, particularly during the Global Financial Crisis, on how to manage balance sheets effectively during economic times of uncertainty, are being exhibited today. The balance sheets are in really good shape. The terms of maturities or debt maturities are long, and there are a significant amount of fixed maturities across the REITs. Dividends and cash flows are really well covered today versus history, and in terms of leverage metrics, debt coverage is quite high at around about six times versus less than three times pre-GFC. So we're actually in a really good balance-sheet position entering a slowing economic cycle.

The next slide better articulates the valuations and growth outlook that we have across our business. This is proprietary data, and what you're looking at is the real estate discounts or pricing discounts that we have for our stocks versus private-market values. Today, we're trading at a 23% discount to net asset values. That's significant in itself, and we believe it is captured in the context of being overly conservative as well, in that we've actually applied private-market discounts across many of our companies to capture this discount. From a growth perspective, earnings growth has actually been good in 2022, and we expect it to be stable and growing in 2023 in the face of a slowing economic cycle. We're looking for mid-single-digit growth at present. From a dividend perspective, the global REITs dividends are well covered and they're delivering, we think, around about a 4.8% dividend yield in 2023, growing at 10%.

This slide gives you some more context as to, I guess, the historic significance of where we're at today. For the purposes of this exercise, I used the U.S. REIT share-price premium/discount to NAV because of its long history to 1990. But really, what I wanted to show you was, one, that we don't really get to greater than 20% discounts to NAV very often. As you can see, I would say three or four times during the past 30 years. The next point would be that we believe the discount today is actually unwarranted given the earnings and balance-sheet stability that we have today within the REIT sector.

The next slide gives you a bit of context as to what might happen moving forward. We believe there's a historic entry point to invest in REITs today. From a global-REIT-market-performance perspective, we've done some work to look back at over 20 years of history and assess what happens to REITs when they're actually being trading at deeper than 20% discounts to NAV and how their performance might be over the preceding 6-, 12- or 18-months periods. There are two key takeaways here; the first is that the returns after a very deep discount are typically quite positive, high double-digit in many cases, but also, from a relative perspective, you can see that global REITs actually perform quite well versus broader equities as well.

I want to give you a bit of an insight into UBS CBRE Property Securities Fund. The fund is an actively managed portfolio that provides investors with an opportunity to gain access to asset classes that otherwise would not be accessible at scale in the private market. From that perspective, in terms of our investment style, our investment style places an emphasis on companies with above-average growth, quality and attractive valuation.

From a sector perspective and a geographic perspective, our portfolio is really well diversified. I think, from a sector perspective, I'd like to call out two key attributes that we're considering and looking for in the companies we invest in today. One is pricing power, and the second is resilience. A couple of sectors that are exhibiting either both or one of those attributes today include data centres, self-storage, industrial, and residential. When I mean residential, I'm talking about residential for rent rather than residential developers. The portfolio itself is actively managed. It's delivered returns both in the short and the long term that have significantly beaten the benchmark but also outperformed passive strategies. This is on a net-after-fees basis.

Finally, we believe REITs are positioned to outperform. We believe, actually, the REIT market is dislocated at the moment and the pricing is not reflecting the reasonably attractive fundamentals we have in the global REIT market. Historically, we believe it's a rare opportunity to invest. There is relative strength in earnings across markets and across the sector as a whole. We think that'll continue into 2023, and that balance sheets are actually in great shape. It's a great time to buy REITs.

Thank you for your time today.

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Justin Pica
Global Portfolio Manager
CBRE Investment Management

Justin Pica is a Global Portfolio Manager and leader of the Listed Real Assets research team in Asia Pacific. In addition, Justin has oversight of the Sydney-based office. Justin joined the predecessor firm of CBRE Investment Management's...

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