Real Estate Investment Trusts (REITs) performed well in the first four months of the year, despite the sector returning to -0.2% in April after investors focused more on market risk. Despite the April lull, cumulative returns of 16.9% on REITs should be seen as compensation for the lost ground. Rising interest rates in recent years have negatively impacted the performance of REITs. Despite the push for higher rates, it is very interesting that the result does not appear to be a contingency at the moment, as the 10-year US Treasury hovers around 2.5% and the REIT’s performance is almost in line with 2017.
We believe this scenario supports the idea that investors should consider a more likely exit approach than a binary approach. That is, while allocations to REITs are likely to change (or even in-kind), we believe the sector needs some level of ongoing allocation. Based on the approximately $ 23 billion outflow of real estate funds in 2018 and previously neutral inflows in 2019, many overweight investors remained in the sector.
While public property valuations may not be as “cheap” as they were last summer, valuations do not appear to be excessive. First, due to a fairer Federal Reserve, false pre-rate expectations limit the downward pressure on Real Estate house prices that would occur if interest rates were significantly higher. Second, the turbulent global macroeconomic environment continues to emphasize the more predictable earnings and dividends of REITs, as REITs are more exposed to internally generated earnings than most industries.