Recent volatility in interest rates has created a sentiment headwind for the U.S. REIT market. However, given the group's dramatic underperformance since the beginning of 2022 and its discounted valuation, we believe the market has already priced in that incremental risk. Moreover, a more resilient labor market, combined with softening inflation data, bodes well for a near-term end of the Fed's current rate-tightening cycle and improved REIT sentiment. Outside the office sector, fundamentals remain steady, with roughly 4% funds-from-operations-per-share growth expected in 2023, followed by 7% in 2024. Barring a major economic contraction, we expect REIT fundamentals to remain steady for most property types given long lease durations, low supply risk and defensive- and secular-based demand.

• The U.S. real estate investment trust (REIT) market dropped 7.5%, essentially giving back all of its year-to-date returns. On a relative basis, REITs have lagged the tech-heavy Standard and Poor's 500 (S&P 500), which declined 3.4% in the quarter but still boasts a 13% gain overall for 2023. U.S. REIT sentiment was hit with an incremental sentiment headwind from a dramatic rise in rates, with the yield on the 10-year Treasury note jumping 70 basis points during the quarter — from 3.8-4.5%.
• The European REIT market saw a positive return of 1.4% (USD gross total return). Europe experienced a rebound in the third quarter despite the generally increasing global bond yield environment, led by sectors and countries that had largely underperformed in the previous 12-month period. For the year-to-date period until the end of September, Europe returned minus 5.0%.
• The Asian real estate equity market retreated by minus 4.2% in September. Hong Kong led the decline, at minus 12.5%, followed by Australia at minus 9.3% and Singapore at minus 4.6%. Japan was the exception, at +1.7%).