The FTSE Nareit All Equity index saw total returns up 11.86% in November, pushing into positive territory for 2023. The gains were broad based, with nearly every property sector posting double-digit positive returns for the month. The gains were fueled by increasing signs that inflation has been reigned in, which could lead to an easing of the Fed’s monetary policy.
The performance could just be a preview of what is to come in 2024, with REIT backers pointing to the historical performance of publicly-traded REITs after a stretch of interest rate hikes.
Most market observers believe the Fed is at or near the end of its run of raising interest rates and many believe it’s possible that the Fed may even begin cutting rates as soon as the second half of 2024.
Industry association Nareit’s 2024 outlook points to cautious optimism that the REIT recovery could be underway.
“Even in this new phase of monetary policy, the current high level of interest rates will continue to affect CRE,” according to the outlook piece. “Nevertheless, we are cautiously optimistic that despite those challenges, the REIT recovery could begin next year. The impressive performance of REITs during late October and November may be a signal that, as in previous periods of monetary policy adjustments, the end of the rate-rising cycle will herald a period of REIT outperformance.”
In November, infrastructure REITs (generally cell tower REITs) led the way and were up 19.90% followed by self storage (14.99%) and office (up 14.56%). The only segments to not post double-digit gains in total returns were residential (7.12%), healthcare (6.96%) and gaming (-3.72%).
WealthManagement.com spoke with John Worth, Nareit executive vice president for research and investor outreach, about the outlook and the recent results for REITs.
This interview has been edited for style, length and clarity.
WealthManagement.com: Let’s start with your outlook report. Can you highlight some of the key takeaways as we head into 2024?
John Worth: There’s a bunch of interesting stuff in here domestically and globally on how portfolios are going to get built and how institutional investors are going to use listed real estate. The new piece also has some visualizations on how to think about REITs and listed real estate in visual terms. One is on the evolution of the property sectors over time and another shows the exposure you can get through the FTSE global REIT index.
The most important theme out of the outlook is this notion that we are turning into a new phase of monetary policy and very much at the end of the tightening phase and perhaps turning into an accommodative mode. We will certainly see a stabilization and perhaps interest rates declining midyear or slightly thereafter.
WM: And I think we’ve talked before about the historical performance of REITs in this period. Can you remind me of what has happened in past years?
JW: Historically we have seen that when we reach the end of a tightening cycle, REITs perform quite well on an absolute and relative basis. When you look at the four quarter returns, after the Fed has reached rate stabilization, REITs return over 20% historically over that next 12 months. That’s well ahead of both equities and private real estate. And we think it reflects the fact that REITs pay a penalty during tightening phases. We experienced that in 2022 and the first 10 1/2 months of 2023. So, you do get some giveback once you reach the end of that tightening cycle.
And we’ve talked before about the divergence between public and private real estate. We’re also expecting that gap to continue to close throughout 2024. We expect that process to continue. We think there are positive signs in terms of monetary policy and positive signs in terms of performance relative to private real estate.
The last leg of the outlook is just that REITs have the ability to manage through a period of sustained higher interest rates and how their balance sheets can help them manage through and even thrive in a higher interest rate environment.
WM: How does this dovetail with November’s results, which looked very strong almost across the board.
JW: November results were extremely strong. A lot of that reflects that we got multiple signals that the Fed rate rising cycle is very near or at its end. And a lot that was kicked off when we got a good read on CPI and both bonds, stocks and REITs in particular had a strong run after that. We ended with REITs up 11.9% for the all-equity index with positive returns across the board. On a year-to-date basis, the all equity is now up 2.3%, as of the end of November and that continued into this month, with the index up 4.5% year-to-date as of Thursday.
WM: If this is the beginning of a run, how much more runway might investors have?
JW: Our sense is there is more runway. As we are talking to investors, one of the things we try and caution people—and this is true in equity generally—is when you look historically, big chunks of returns come on specific days. You need to be in the market. It’s hard to market time. You will see a lumpiness in terms of daily returns and how they accumulate. That tactical opportunity is still there, but you have got to move. You never know when those price returns come back.
WM: Were there any other themes in your outlook report that you would highlight?
JW: We have a section on portfolio construction. It’s a leading indicator of what we will see more of in 2024 and beyond. We pulled together four case studies that we published in 2023. It shows you there is this diversity of problem solving that REITS can be used for. It can be for geography or it can be a tactical need. And there is portfolio completion in terms of sectors. And as we highlight in the end, you can use REITs to also meet sustainability targets. Three of the case studies are very much about using REITs to get at property sectors that an investor is missing. And in each of those cases it is about accessing new and emerging property sectors. It’s not just data centers, cell towers and healthcare, but also self-storage, hotels and housing. So, it’s a really diverse set of problems that can be solved through this approach. We also include an example of a tactical application.
WM: What about also exposure to international property markets?
JW: One of things we like to emphasize when we talk a lot about U.S. returns is that when you do take a step back and look at global returns, even within the same property sectors you see diversity across the globe. It’s one of benefits of having diversification. And to have global real estate strategy is much more straightforward with REITs than trying to build a global real estate portfolio.
One of the really interesting divergences is the office sector, which is better in Europe than in the U.S. and Asia. There are positive returns in Europe vs. negative in the U.S. and Asia. You can point to a difference in return to work activity and broader underlying sentiment. Similarly, we saw healthcare perform well in the U.S., but in Asia and Europe, it has been lagging.
WM: Have any new countries added REIT legislation? Where do we sit in terms of the number of countries that use REITs?
JW: We’re at 40 countries with REITs. I know that there are some in the works, but I’m not aware of any that have formally added REITs recently. At the beginning of 2024 we will do a review and make sure there haven’t been some REIT regimes added that we have missed.