History says REITs now due for strong uplift: | Australian Markets

New commentary from world asset supervisor, American Century Investments, has prompt that the historic observe document of real estate investment trusts (REITs) signifies there may be the strong chance of an “upswing” in returns this yr, regardless of present low valuations.

Steven Rodriguez, Vice President and Portfolio Manager at American Century, stated a lack of provide, significantly in senior housing development, has seen valuations scale back but additionally paves the way in which for a stronger rebound.

“Listed REITs valuations are trading today at some of the widest discounts that we have seen relative to the S&P 500 for several decades. The last time valuations traded this cheap, we saw strong relative and absolute returns for the REIT sector,” he stated.

“The strongest tailwind at the moment for REITs is a lack of provide. Given the very high rates of interest we’ve had lately, we’ve seen little or no new development as a result of of high capital prices.

“As a end result, over the subsequent 12 months we count on to see a dramatic fall in new development completions, which implies higher pricing and earnings energy for a giant majority of the REIT universe.

“The elevated rates of interest that troubled REITs are now serving to fundamentals. That’s as a result of increased rates of interest, which elevated the associated fee of accessing capital, slowed new real estate development over the past three years.

“The result is a favourable supply-and-demand dynamic for most existing operating assets.”

According to Rodriguez, roughly four-fifths of American Century’s REIT space is experiencing its lowest price of provide growth within the final 5 years, with single-family housing and knowledge centres – due to trending artificial intelligence (AI) thematics – rising unscathed.

“We feel most bullish about senior housing estate in the current supply-demand environment,” he stated.

“From a demand perspective, we’ve got about 11,000 people within the US turning 65 years previous every day. However, while you evaluate that to provide, you solely get 25,000 to 30,000 new models of development completions yearly for seniors housing, so that’s a very massive imbalance between demand versus provide.

“As a result, pricing power is very high, and therefore, the earnings power of REITs involved in seniors housing is increasing.”

Rodriguez additionally signalled expectations that each inflation and rates of interest within the US would proceed on its present trajectory towards the Federal Reserve’s goal vary, thus posing no risk for REITs.

He additionally recognized a number of alternatives within the Australian REITs market that would capitalise on enticing valuations and the potential for declining rates of interest, together with Scentre Group, Stockland, Mirvac Group and Charter Hall Group

“We see anchors of inflation moving forward, including shelter inflation. We see shelter inflation still has a lot more room to fall providing downside pressure to inflation. We see that as acting as an anchor to overall inflation,” Rodriguez stated.

“Moreover, listed REITs have dramatically outperformed private property in the last few years, which is the result of high leverage in the private real estate industry. Listed property also offers greater transparency and they have better balance sheets.”