Outlook for the Year Ahead
Factors that could bode well for the global REIT market in 2024 and beyond include:
- Uncertainty about the direction of the economy and the timing and extent of central bank policy tightening has clearly peaked and begun to recede.
- Inflation has demonstrably peaked and is on a trajectory towards the Fed’s 2% target, even before the economy has experienced the full (lagged) impact of the Fed’s tightening measures thus far.
- The Fed has declared that it is close to or at the end of the tightening cycle, which means that it is also closer to its first rate cut – forecasted to occur as early as Q2 2024.
- Long-term interest rates (7-10 years which serve as the cost of capital benchmark for commercial real estate) peaked at 5% in October and have since already declined to below 4% — thus serving as less of a headwind and even a bit of a tailwind for most property types.
- The equity market has passed the point of peak pessimism — and the inflection to improved sentiment is yet another bullish factor for stocks.
- Commercial real estate industry fundamentals (i.e., the balance between supply and demand) remain healthy for most property types, and even strong for many, including data centers, cell towers, student housing, single-family rental homes and manufactured home communities — notably, all of which are Specialty property types.
How are Global REITs Positioned vs. the Broad Equity Market?
Looking ahead into 2024, the consensus estimated growth of earnings for Global REITs is +4.3%, while the MSCI World Index is projected to have earnings growth of +4.8%.1 The disparity in relative performance in 2023 along with closely comparable expected earnings growth in 2024 presents a compelling set-up for REITs to “catch up” by outperforming in 2024.
In addition to their attractive set-up, REITs’ historical record of relative performance bolsters the case for listed real estate outperforming the broad market in 2024. The average annualized return of Global REITs from 2000 – YTD 2023 was 10.2% vs. that of the MSCI World Index of 7.1%2 – suggesting that 2024 could indeed see global REITs perform well.
Commercial Real Estate is “On Sale” in the Public Market
All the stress that weighed on the market has driven a sharp sell-off since 2022 which has put commercial real estate “on sale” in the public market, as evidenced by the large discounts to private market value. Not only are the discounts large, but they are also substantially larger than the long-term historical average. At the end of November 2023, the average discount was 17% below private market value vs. the historical average of -9%.3
Public vs. Private – Arbitrage Opportunity
The difference in valuation methodologies between public real estate and private real estate can (and like now, often do) create pricing dislocations and thus compelling arbitrage opportunities. Private real estate vehicles (i.e., funds and REITs) report valuations that are based on appraisals, which are by definition backward-looking and smoothed, while public REITs are valued daily by the equity market which looks forward and discounts the market’s expectation for conditions in 3-6 months — as well as reflecting the balance between the emotions that inform investor sentiment. These short-term differences in returns will eventually catch up and converge, and over the long sweep of time public REITs have historically delivered total returns that exceed those generated by private real estate — in addition to their other benefits of greater liquidity, better diversification, lower leverage, access to higher-growth specialty property types and alignment of interests through high insider ownership. The very large delta in performance since 2022 between public REITs and private real estate vehicles created a wide valuation gap making public REITs an attractive investment opportunity — particularly in comparison to the dated and thus still-high valuations being reported by private real estate vehicles. Indeed, when public REITs have traded at NAV discounts above 10%, they have subsequently outperformed private real estate by more than 1,500 bps per year over the next three years.4
Recent M&A Activity in the Public REIT Market
Historically, the combination of such large discounts to private market value, along with enormous pools of capital being raised by private equity funds, has resulted in a surge in M&A activity. Under such conditions, private equity funds sometimes in conjunction with sovereign wealth funds seek to buy commercial real estate “on the cheap” in the public market. Over the last 18-months or so, there have been 14 such transactions and the portfolio benefited by owning five of those 14 companies. Also notable, the combined aggregate consideration for all 14 transactions was $96 billion and the observed premium to the last sale price averaged 30.8% – reflecting the buyers” willingness to pay an additional premium in respect of public REITs owning portfolios of generally higher quality assets and in better locations.5
Despite the lingering macroeconomic uncertainty and geopolitical stress capturing headlines, our outlook for the global real estate market is increasingly constructive. Real estate fundamentals and earnings growth remain healthy amidst an environment characterized by low supply in many sectors, paired with high construction costs.
Our high conviction, benchmark-agnostic investment approach allows us to maintain a laser-focus on identifying and owning only the 50 highest-quality companies in our investable universe. We have high confidence in our fundamental research as well as in the management teams of the companies we own. While global capital markets continue to experience transitory periods of market distraction by non-fundamental factors, we believe our portfolio is well positioned as investor attention inevitably returns back to fundamentals.
Global REITs represented by the FTSE EPRA Nareit Developed Index and the broad equity market represented by the MSCI World Index.
1 Source: UBS and MSCI. As of December 1, 2023.
2 Source: Bloomberg. As of December 14, 2023.
3 Source: UBS, as adjusted by Ranger Global to account for regional nuances of countries as of November 30, 2023. Historical performance is not indicative of future performance.
4 Source: Green Street Advisors, The Volatility Opportunity, July 26, 2022.
5 Source: Bloomberg
Risks & Disclosures
Investors should carefully consider the investment objectives, risks, charges and expenses of the Fund. This and other information is contained in the Fund’s prospectus, which can be obtained by calling 888-814-8180 and should be read carefully before investing. Additional Fund literature may be obtained by visiting Funds.EasterlyAM.com.
Past performance does not guarantee future results and current performance may be lower or higher than the performance data quoted. The investment return and principal value of an investment will fluctuate, so that shares when redeemed may be worth more or less than their original cost. Investors cannot invest directly into an index. For performance information current to the most recent month-end, please call 888-814-8180.
Past performance is not a guarantee nor a reliable indicator of future results. As with any investment, there are risks. There is no assurance that any portfolio will achieve its investment objective. Mutual funds involve risk, including possible loss of principal. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities, LLC. Easterly Investment Partners, LLC and EAB Risk Solutions, LLC are affiliates of Easterly Securities, LLC, member FINRA/SIPC. Orange Investment Advisors, LLC and Ranger Global Advisers are not affiliated with Easterly Securities, LLC. Certain associates of Easterly Securities, LLC are registered with FDX Capital LLC, member FINRA/SIPC.
There is no assurance that the portfolio will achieve its investment objective. The Fund is subject to stock market risk, which is the risk that stock prices overall will decline over short or long periods, adversely affecting the value of an investment. Risks of one’s ownership are similar to those associated with direct ownership of real estate, such as changes in real estate values, interest rates, cash flow of underlying real estate assets, supply and demand and the creditworthiness of the issuer. International investing poses special risks, including currency fluctuations and economic and political risks not found in investments that are solely domestic. Incorporating alternative investments into a portfolio presents the opportunity for significant losses including in some cases, losses which exceed the principal amount invested. Also, some alternative investments have experienced periods of extreme volatility and in general, are not suitable for all investors. Asset allocation and diversification strategies do not ensure profit or protect against loss in declining markets.
As with any investment, there are multiple risks associated with REITs. Risks include declines from deteriorating economic conditions, changes in the value of the underlying property and defaults by borrowers, to name a few. Please see the prospectus for a full disclosure of all risks and fees.
THE OPINIONS STATED HEREIN ARE THAT OF THE AUTHOR AND ARE NOT REPRESENTATIVE OF THE COMPANY. NOTHING WRITTEN IN THIS COMMENTARY OR WHITE PAPER SHOULD BE CONSTRUED AS FACT, PREDICTION OF FUTURE PERFORMANCE OR RESULTS, OR A SOLICITATION TO INVEST IN ANY SECURITY.
Easterly Funds, LLC serves as the Adviser to the Easterly Fund family of mutual funds and related portfolios. Easterly Funds, LLC is registered as investment advisers with the SEC. Effective 10/2/2023, the Easterly mutual funds are distributed by Easterly Securities, LLC. Although Easterly Funds, LLC is a registered investment adviser, registration itself does not imply and should not be interpreted to imply any particular level of skill or training.