REITS READY TO RISE AS RATES SET TO FALL
Sep 11, 2024
PGIM Real Estate shares insights on global real estate and highlights defensive-demand opportunities expected to continue outperforming in a slowdown.
SOLID REIT FUNDAMENTALS DESPITE RATE UNCERTAINTY
The U.S. REIT market was roughly flat in the second quarter, driven largely by ongoing interest-rate uncertainty. The quarter’s top-performing REIT sectors were healthcare and apartments, while industrial and hotel lagged due to slowing demand.
While short-term volatility may persist, our outlook for REITs in the next 12 to 18 months remains constructive. The combination of solid economic demand and declining interest rates should create an ideal backdrop for REITs. Although rates may prove “stickier” than in prior cycles, we believe the current favourable demand-and-supply outlook for most property types may persist for years.
M&A AND PRIVATISATION COULD CONTINUE RISING
REITs continue to trade at significant discounts to private real estate. As rates stabilise, the valuation discrepancy likely will lead to increased merger-and-acquisition (M&A) opportunities for private-equity players looking to invest in discounted REITs.
FOCUS ON PROPERTIES WITH COST-OF-CAPITAL ADVANTAGE AND DEFENSIVE DEMAND
In light of volatile markets, we continue to favour property companies that can use their cost-of-capital advantage to generate external accretive growth opportunities. Defensive demand sectors (e.g., assisted living facilities where occupancy levels remain meaningfully below pre-COVID-19 levels), and special situations in select M&A takeover targets are key areas with strong net operating income growth potential. In the second half of 2025 and early in 2026, we anticipate self-storage and apartments to cycle through decelerating fundamentals. If dislocation and interest rate decreases occur, dislocation movement in the housing market will likely drive self-storage demand.
RICK ROMANO, CFA
Head of Global Real Estate Securities, PGIM Real Estate
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