REITs and Commercial Real Estate Well Placed for Longer Term Despite Recent Volatility
July 13, 2022 | Steve Hentschel | Boston Real Estate Times
Coming off of one of the strongest years on record, the REIT market is relatively well placed despite the recent volatility. JLL’s Strategic Transactions Monitor details themes driving the REIT market, including a constructive outlook in light of sharply rising rates, an increase in take-private activity and dissipating COVID-19 driven trends.
REITs, along with broader markets, are down 20% year to date, driven by growing inflation, Federal Reserve rate hikes and broader geopolitical risks. Though market participants have focused on near-term underperformance, REITs have outperformed on a longer-term basis. Since January 2021, REITs have outperformed the S&P 500 by over 14%, driven by 43% total shareholders returns achieved by REITs during the year. Self-storage and industrial sectors led the outperformance, up 59% and 45%, respectively, in 2021.
“There is an ever-larger correlation of REIT trading performance with broader equity markets, currently 92% compared to the S&P 500 on a rolling three-month basis, which is exacerbated by the proliferation of quant driven trading activity and the advent of passive equity investors, like index funds, in the REIT space,” said Steve Hentschel, Head of the M&A and Corporate Advisory Group within JLL Capital Markets. “The correlation has been even more pronounced during periods of extreme volatility such as the Global Financial Crisis and COVID-19, and we are also seeing it today. The big picture trend is that REIT trading prices continue to be further and further disassociated from real estate values.”
REITs are trading at an average discount to net asset value (NAV) of over 15%. A sustained dislocation in public and private values could be a precursor of opportunities for fundamentals driven private market participants, leading to take-private M&A. In addition, discounts to NAV have resulted in an unfavorable equity cost of capital, evidenced by follow-on equity issuance of only $8 billion year to date, a much slower trajectory than 2021 when over $27 billion of follow-on equity capital was raised during the year.
