Australian Real Estate Investment Trusts (A-REITs) on the S&P/ASX 200 index have slumped 6 per cent in the year-to-date (YTD) and by as much as 17 per cent from their February peak.
Global REITs have suffered the same fate, slipping 10.8 per cent over the year-to-date and by up to 20.7 per cent from the 2023 peak.
This has come amid surging bond yields and aggressive monetary policy tightening from central banks as part of a global effort to curb inflation.
Investor sentiment in the REIT market has waned further over the past month as markets increasingly anticipate a protracted battle to return inflation to target and a harder landing for the global economy.
These headwinds have added to existing structural challenges facing the commercial real estate (CRE) space, particularly across the retail and office sectors.
But according to Matt Sgrizzi, chief investment officer at LaSalle Investment Management Securities, global REITs are undervalued and poised to deliver strong returns for investors.
Mr Sgrizzi said the net asset value (NAV) discount on global REITs was approximately 20 per cent as at 30 September 2023.
“Historically, REITs have outperformed private real estate by more than 9 per cent and equities by 15 per cent when NAV discounts were greater than 10 per cent,” he said.
He said REITs can “smooth the impact” of economic cycles, providing investors with “defensive, durable income streams” from contractual leases.
“Rents tend to move with inflation, so income increases as the costs of living rise, providing an important hedge against inflation,” Mr Sgrizzi continued.
“Furthermore, REITs have solid financial positions with low levels of leverage and a high proportion of fixed, long-term debt, giving them the ability to weather capital market uncertainty and possibly benefit by taking advantage of market distress, should it arise.”
Chris Bedingfield, principal and portfolio manager at Quay Global Investors, agrees.
He acknowledged the macroeconomic and structural challenges facing the real estate market but noted the fundamentals underlying growth remain strong.
“When it comes to real estate, supply and demand matter. Based on company feedback and published macro-economic data, there is little sign there will be any new supply to the property in the medium term,” he said.
“As a result, we are expecting an emerging rental squeeze across most real estate asset classes over the next few years.”
AMP chief economist Shane Oliver said he expects the Australian and global REITs to deliver returns of 7.5 per cent and 6.4 per cent, respectively, over the medium term.