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.
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
For Professional Investors only. All investments involve risk, including the possible loss of capital.
Past performance is no guarantee of future results.
The views expressed herein are of PGIM Real Estate as of 19 June 2023 and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or as an offer to sell or a solicitation to buy any securities mentioned herein. Any projections or forecasts presented herein are subject to change. This commentary does not purport to provide any legal, tax or accounting advice. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
Prudential Financial, Inc. (“PFI”) a company incorporated and with its principal place of business in the United States. PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
© 2023 Prudential Financial, Inc. ('PFI') of the United States and its related entities. PGIM and the PGIM logo are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
For compliance use only 2956521