2024’s Signs of Recovery for Real Estate Securities?

11 January 2024

When the US Federal Reserve signaled in December 2023 that it would start cutting rates in 2024, it fueled a rally in stocks and bonds.

Among them were real estate securities from not just the United States but around the globe, which typically perform well after the end of rate tightening cycles.

The VanEck Global Real Estate UCITS ETF (the “ETF”) is normally seen as a good proxy for public real estate securities. From the 2023 lows touched in late October, it had rallied by almost 20% by the year end as speculation mounted that central banks would reduce rates. In fact, the historical performance of the ETF placed it in the top positions among its potential peer group by 1-month return, as well as 1-, 3-, 5-, and 10-year returns.

  1M 1Y 3Y 5Y 10Y
  VanEck Global Real Estate UCITS ETF   10.30% 12.88% 2.74% 3.92% 3.94%
iShares Developed Markets Property Yield UCITS ETF USD (Dist) 9.98% 8.93% 1.14% 2.69% 4.08%
HSBC FTSE EPRA NAREIT Developed UCITS ETF 9.53% 10.01% 1.41% 2.96% 3.65%
SPDR® Dow Jones Global Real Estate UCITS ETF 9.43% 10.35% 2.36% 2.88% 3.48%
Amundi Index Solutions - Amundi Index FTSE EPRA NAREIT Global UCITS ETF DR (D)EUR 9.42% 9.73% 1.19% 2.83%  
Lyxor FTSE Epra/Nareit Global Developed UCITS ETF D EUR Inc 9.41% 8.93% 0.66% 2.29% 3.25%
Credit Suisse Index Fund (IE) ETF ICAV - CSIF (IE) FTSE EPRA Nareit Developed Grn Bl UCITS ETF B USD 9.85% 6.29% -0.57%    
BNP Paribas Easy FTSE EPRA Nareit Global Developed Green CTB UCITS ETF EUR Capitalisation 8.90% 10.62%      

Source: Morningstar Direct. Past performance is not guarantee of future results. Data as of 31 December 2023.

Despite the historical performance, associated risks must be considered before investing in this ETF.

Fed chair Jay Powell set the tone in markets when he remarked that the US benchmark interest rate was “likely at or near its peak for this tightening cycle”. Although the Fed December meeting’s minutes, released in early January, had a more hawkish tone, the stage appears set for at least somewhat lower borrowing rates—which have a disproportionate effect on real estate because its business model depends more on debt than other sectors.

For public real estate securities, and real estate investment trusts (REITs) especially, this led to a welcome burst of positivity after a testing two years when central banks had pushed interest rates higher to quell inflation. Among others, the European Central Bank and Bank of England are also expected to cut rates at some point in 20241.

In its 2024 outlook, Nareit, the association representing REITs investing in the US, noted: “With the Federal Reserve at, or near, the end of its tightening cycle, REITs are well situated for outsized performance in 2024.”2

Historically, US REITs have outperformed both equities as a whole and private real estate during the 12 months after the Fed has stopped increasing rates, according to Nareit’s analysis of the last four full rates cycles (see chart). This has followed REITs’ underperformance during the time that the Fed has been raising rates.

REITs Historically Outperform After Fed Tightening Cycles

Average Total Returns During and After Fed Tightening Cycles

Source: Federal Reserve Board; Nareit; NCREIF; FactSet. Date as of 2023:Q2.
Note: Public equity REITs, private equity real estate, and stock market performances were measured by the FTSE Nareit All Equity Index (FTSE Nareit), the NCREIF Fund Index-Open End.
Diversified Core Equity (NFI-ODCE), and the standard & Poor's 500 (S&P 500), respectively.

But there could be more reasons for optimism. Firstly, a valuation gap has opened up between public and private real estate valuations in the past two years. This is shown by differences between US public and private real estate capitalization rates – calculated by dividing a property’s net operating income by its current market value. That gap is likely to converge in 2024, according to the Nareit outlook, partly as lagging private real estate valuations fall.

Secondly, the companies behind public real estate stocks have solid balance sheets. Unlike in previous cycles, they have tended to have low leverage and high debt coverage, with net operating income providing a greater cushion over interest expenses than at the time of the 2008-2009 global financial crisis.

Shareholders' Equity to Total Assets

Source: S&P Capital IQ Pro, Nareit T-Tracker(R)

Interest Expense to Net Operating Income

Source: S&P Capital IQ Pro, Nareit T-Tracker(R)

Against this backdrop, the picture for real estate securities globally may well be brightening. While the unbridled optimism about interest rates that characterized the end of 2023 has faded somewhat in early 2024, central banks still appear to believe that rates have peaked.

And the optimism about the outlook is far from confined to the US. For instance, the European Public Real Estate Association’s Developers Research Benchmark, which tracks the performance of Europe’s most liquid real estate developer’s shares, rose 16.8% in November 2023 (the most recent data at the time of writing).

It’s also true that house prices are proving resilient in markets like the UK, the Netherlands and Germany. Dirk Wohltorf, President of Germany’s Studie des Immobilienverbands Deutschland real estate association, reportedly expects a recovery in 2024. “Prices will rise when interest rates fall again, but probably not before the fourth quarter of 2024,” he says.

Across the Atlantic, this view is shared by Nareit in its outlook: “Looking to 2024 and beyond, it’s clear that potential total return outperformance, attractive pricing with converging valuations, and solid balance sheets will likely increase the appeal of REITs and offer investors tactical and strategic investment opportunities.

“Though 2022 and 2023 were challenging years for REITs, the recovery is on the horizon.”3

1 Source: FT, https://www.ft.com/content/862f14fd-da31-4e38-8404-e70904a8fd4b

2 Source: Nareit, https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook

3 Source: Nareit, https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook

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This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

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