Valuations of Real Estate Investments Trusts (REITs) are currently attractive for three reasons, according to the experts of Hazelview Investments. In their latest commentary they highlight winners and losers in the global real estate market in Q2-2203.
Global REITs posted a slightly positive return of 0.5% (in US dollar terms) in the second quarter of this year and ended the first half of the year with a performance of +1.6% (in USD). Germany performed +6.5% (in EUR), the second-best performing REITs market globally after Japan, driven by better valuations of multifamily REITs. This was pointed out by the experts at Hazelview Investments, a global alternative investment manager with a focus on real estate, in their “Quarterly Manager Commentary Q2 2023”.
Accordingly, the housing segment in particular and demand for affordable housing were stronger than ever; but special real estate sectors such as data centres and retirement homes also proved very resilient in the second quarter.
“While REITs could not match the gains of the big tech stocks, their share prices benefited from robust economic growth in the second quarter, which was accompanied by better-than-anticipated corporate earnings around the world,” says Claudia Reich Floyd, portfolio manager for global real estate equities and head of Hazelview Investments’ Germany office, commenting on the quarterly results.
Three reasons currently speak for REITs
She points out that REIT valuations are currently attractive for three reasons: First, commercial and residential real estate fundamentals and cash flows remain stable. Share prices are roughly where they were at the beginning of the year.
Second, REITs trade at a large discount to other listed securities. From the beginning of the second quarter of 2022, when central banks started raising interest rates, until the end of the second quarter of 2023, valuations of global REITs were about 20% lower compared to global equities.
Third, REITs are also currently valued 21% lower than core stabilized private real estate. “If REIT valuations were to return to the level at which the private real estate market is today, this would equate to an upside of about 27%,” says Reich Floyd. “This puts the valuation gap at a historical level exceeding that from the global financial crisis and at the start of the pandemic in March 2020.”
Good German performance does not pull out European REITs market
In terms of world regions, Japan (+7.4% in JPY) achieved the best result in the REITs segment, making a successful comeback after underperforming in the first quarter. The second-best performing world market was the US with 2.6% (in USD).
On the losing side in Q2 are Canada (-2.2% in CAD), Singapore (-3.3% in SGP) and the UK (-6.9% in GBP). Germany with its +6.5% (in EUR) could not make up for the relative weakness of the European REITs market with -2.4% in Q2, where Finland, Sweden and Belgium generated the weakest results. However, Hong Kong (-9.8% in HKD) suffered the most due to ongoing doubts about China’s growth, which could also impact Hong Kong.
Hazelview Investments is an active investor, owner and manager of global real estate assets dedicated to creating value for people and places. Hazelview employs a global investment and asset management team of more than 90 people in its offices in Toronto, New York, Hong Kong and Hamburg and manages CAD 11.7 billion (approximately EUR 8.0 billion, as of 31 March 2023) in real estate assets. For further information, please visit the website: www.hazelview.com.
