REIT Upside From Banking Crisis
PGIM Real Estate’s Rick Romano explains why the banking turmoil and resulting tighter credit conditions create a good setup for REITs.
Jun 19, 2023
PGIM Real Estate’s Rick Romano, CFA explains why REITs may offer a compelling entry point and strong upside potential as rate hikes stabilize.
The past 18 months have been a wild ride for global real estate markets. The sharp rise in global interest rates over the past year is driving a “great reset” of real estate values. Global repricing is playing out across the board, exacerbated by looming recession risks, making benchmark-driven investing difficult. Global real estate returns will likely remain under pressure over the next 12 months, leaving many investors on the sidelines until the turmoil subsides. With the correction in private markets continuing, REITs offer an attractive entry point and the potential to take listed names private.
In weaker parts of the market, we expect to see some overshooting— higher risks and weakening occupier performance mean prices correcting beyond what is required to simply adjust values to higher market interest rates. On the flip side, parts of the market that are exposed to favorable structural tailwinds and contain supply that supports income generation and income growth should see more limited pricing downside. In aggregate, the repricing story has further to go to fully reflect higher long-term interest rates. As the repricing process unfolds, there will likely be a wave of consolidation as well-capitalized firms buy attractive properties at steep discounts.
Given the current disconnect, REITs offer an attractive entry point to global real estate and an opportunity for outperformance as private markets continue to correct.
A significant disconnect between public and private real estate markets is rare but does occur on occasion. Historically, periods of large disconnects have benefited REITs. Given the current disconnect, REITs offer an attractive entry point to global real estate and an opportunity for outperformance as private markets continue to correct. Given the lagging nature of private real estate, REITs offer investors exposure to real estate at values that have already adjusted significantly. Investors can capitalize on this temporary public-versus-private dislocation by investing directly in REITs to benefit from expected outperformance or potentially by taking REITs private.
With the Fed winding down its tightening, there will be more stability around the outlook for interest rates. This should ease the pressure seen in the REIT market recently. Historically, REITs have shown strong returns after Fed tightening cycles ended. While timing recessions is difficult, value dislocations allow investors to generate above-private-market returns in the public markets, even if the entry point is not precise. While sectors differ, current prices in the REIT market already incorporate substantial discounts to asset values that are broadly in line with our expectations for further private market value declines.
Head of Global Real Estate Securities, PGIM Real Estate
PGIM Real Estate’s Rick Romano explains why the banking turmoil and resulting tighter credit conditions create a good setup for REITs.
In its 2Q23 outlook, PGIM Real Estate shares views on global real estate and where it sees resilient, secular-based demands that will help weather an economics.
PGIM asset managers share perspectives on the shifting landscape and insights on key trends set to shape the second half of 2023 and beyond.
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