A sharp discount in prices for global real estate investment trusts (REITs) represent buying opportunities and a reliable source of income for Australian investors, though balance sheets and liquidity remain in focus given tightening financial conditions, according to LaSalle Investment Management Securities chief investment officer, Matt Sgrizzi.
Global REITs are in a good position to endure a tougher financing environment and prices are now trading at attractive levels after falling significantly over the past 18 months on higher interest rates. Mr Sgrizzi expects outperformance from global REITs, even if global economic growth slows, given the defensive and durable nature of this asset class and the discount in prices.
“Rising bond yields has meant that REIT prices have dropped, and now trade at significant discounts to marked down Net Asset Values (NAVs). Historically, when REITs are trading at a significant discount to their NAV, this has indicated outperformance relative to private real estate and broader equities,” he said.
Global REIT prices were about 25 per cent lower[1] as at 30 September, 2023 from 31 March, 2022, opening up the opportunity for investors to buy assets at lower levels and meaningfully higher implied returns. That could yield investment outperformance over time, Mr Sgrizzi said. The NAV discount on global REITs was around 20 per cent as of 30 September 2023.
“Historically, REITs have outperformed private real estate by more than nine per cent and equities by 15 per cent when NAV discounts were greater than 10 per cent. As a global REIT manager, we aim to identify and seize mispricing opportunities of global REITs between fair value and market prices,” he said.
An additional lure for investors is the return on REITs has both equity and bond like characteristics, while also offering diversification benefits to global investors.
“A key benefit of REITs is also the defensive, durable income streams they can provide, smoothing the impact of economic cycles. Listed property assets typically earn reliable income from contractual rents, which provides a regular income stream to investors. Rents tend to move with inflation, so income increases as the costs of living rise, providing an important hedge against inflation.
Furthermore, REITs have solid financial positions with low levels of leverage and a high proportion of fixed, long-term debt, giving them the ability to weather capital market uncertainty and possibly benefit by taking advantage of market distress, should it arise” he said.
The sector also offers huge diversity in assets both in property type and location, which can help to spread risk for investors.
“The global REIT investable universe is significant, spanning 23 countries, 450 listed real estate securities and 20-plus property types. The G-REIT market is nearly $2 trillion in market cap (in USD) and trades roughly $10 billion a day.
“This includes the traditional retail, office, industrial, multi-family and hotel and resorts REITs, as well as the more specialty focused companies which invest in such property types as data centres, cell towers, self-storage and healthcare, to name a few. Some of these sectors are not readily available in Australia, so, investing globally can broaden investors’ property opportunities and increase the diversification of their portfolios,” he said.
LaSalle Investment Management Securities has approximately US$3.5 billion in assets under management. It partners with Melbourne-based boutique asset management firm, SG Hiscock & Company, which has exclusive rights to distribute the SGH LaSalle Concentrated Global Property Fund and SGH LaSalle Global Listed Property Securities Fund to Australian investors. This month marks the 20th anniversary of the partnership arrangement.
Both funds were recently given a ‘Recommended’ rating by Lonsec, and the SGH LaSalle Concentrated Global Property Fund also won the Global Real Estate Investment Trust category at the 2023 Zenith Fund Awards.
Both are actively managed portfolios that invest in global REITs and real estate operating companies.
“LaSalle’s strategies remain well-positioned to deliver strong returns, with publicly listed REITs offering more attractive valuations than private real estate – we expect this appeal to be maintained through 2024 as investors seeks the many benefits of public real estate investment,” said Mr Sgrizzi.
[1] FTSE EPRA NAREIT Developed Global Real Estate Index
