As we survey the real estate investment landscape in a vaccine-driven recovery environment, the most attractive real estate opportunities we see today are in the listed real estate and real estate investment trusts (REITs). Why?
With interest rates remaining at record-low levels, REITs are trading at wide spreads to sovereign bonds yields
- Listed real estate and REITs repriced sharply in response to the pandemic and valuations remain attractive relative to equities, bonds and private real estate
- REITs offer attractive income returns that are significantly higher than equity dividend and sovereign bond yields
Also, there appears to be a short-term divergence between public and private markets, with REITs currently trade at an attractive discount of 10% to 20% relative to the value of their underlying property portfolios in the private market
- This is a common occurrence in past recessions as REITs, which are liquid, transparent and able to price in new information in real time, react quickly to investors’ changing views of future prospects and cash flows. Private market values, on the other hand, take significantly longer to price-in new information as transaction volumes can dry up during downturns and values are marked-to-market infrequently through the slow-moving appraisal process
- Ultimately, returns for both private and listed real estate are connected to the performance of the underlying assets themselves, which are affected by the same fundamental drivers. Considering that the current economic downturn was caused by a pandemic that severely restricted face-to-face interaction, real estate appears particularly well positioned to benefit in a vaccine-driven recovery as cities, offices and stores reopen for business
This is an efficient way to deploy large amounts of capital and ability to liquidate at will.
- Public markets offer high level of liquidity compared to private real estate where transaction timeframes for properties are typically months (and sometimes even years) and where investments in real estate funds have long lock-up periods
- Transaction costs can be high, especially for direct acquisitions
Also, enhanced diversification benefits by being able to access international markets, alternative sectors, thousands of properties, and dozens of best-in-class management teams. There are broad and attractive opportunities set in alternative sectors including digital infrastructure such as cell towers and data centres, cold-storage logistics, life sciences, and healthcare that can be challenging to access in private markets.
Published on IPE Real Assets, March 2021
Viewpoint: Why listed real estate will benefit from vaccine-driven recover
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