Real estate investment trusts (REITs) have had a tough time over the past two years as central banks hiked interest rates and the property market was plunged into a downturn.
Not a single one of the 33 REITs listed in London are currently trading at a premium, with the average share price is sitting on a 29 per cent discount to its underlying assets, according to data from the Association of Investment Companies.
Some are even worse than that, like Regional REIT on a 74 discount and Life Sciences REIT on a 52 per cent discount.
Meanwhile, performance has been dire: REITs have fallen an average of four per cent over the last five years, compared to a 16 per cent rise in the FTSE 100.
However, some analysts think things might be about to change for the beleaguered sector.
REITs are historically cheap relative to equities, and as central banks have finally pulled the trigger and made their first cuts to interest rates, fund houses are starting to see their potential.
“We believe the 1999-2003 Fed Fund cycle, accompanied by a mild recession, provides the closest example for how REITs could perform during this next Fed cut cycle,” said Kelly Rush, CEO of Principal Asset Management in a note to investors.
“REIT stocks started their rally during the Fed pause in 2000 and continued to outperform materially as the Federal Reserve cut rates and a mild recession occurred.”
According to Principal’s calculations, the first three years after an interest rate cut saw REITs jump 9.3 per cent on average, compared to 7.7 per cent for the wider market and just 5.2 per cent for private real estate.
Listed trusts are able to take advantage of the favourable conditions better than private real estate due to their first mover advantage over the latter, thanks to their “liquidity and favourable cap rate compression,” said Principal.
The data indicates this is starting to pay off, as UK REITs have grown by an average of nine per cent over the last year, as the markets anticipated the eventual rate cuts that came over the summer.
In the US, performance has been even better, as the trusts have grown a whopping 13.2 per cent over the last three months, compared to just 3.7 per cent for the S&P 500.
“For investors looking to deploy capital into real estate equity markets, the listed REIT market offers compelling relative value,” Rush added.
Prinipal said it favoured REITs focusing on healthcare and industrials, while being especially cautious about shopping centres and office-focused REITs.