The global REIT sector could bounce this year when the US Federal Reserve begins reducing interest rates, with the relatively robust macroeconomic environment supporting the demand for property, according to Chris Bedingfield, principal and portfolio manager, Quay Global Investors. He sees good opportunities in residential property, senior housing and brick and mortar retail properties.

“If history is any guide, and central banks begin to reduce interest rates, the global REIT sector is due for a bounce, supported by the relatively robust macroeconomic environment. From a timing perspective, global real estate begins to generate outsized returns to investors in the lead-up to, and after, the first interest rate cut by the US central bank,” Mr Bedingfield said.

“Long-term real estate security prices follow earnings, and earnings, in turn, are driven by rents and cashflows. For investors looking to take advantage of these opportunities, the global listed property market provides more diversification and access to these sectors that are not readily available in markets such as Australia,” he said.

“With this in mind, we are seeing promising opportunities in several sectors, including residential rental properties driven by a global housing shortage. Senior housing is another area where we see potentially strong growth along with shopping malls, as landlords mark rents up to better reflect economic reality and the strong inflation we’ve experienced in recent times.”

According to Mr Bedingfield, central bank actions designed to curb inflation has sent a signal to builders to stop building.  And globally they have listened.  Meanwhile populations continue to grow creating a significant demand and supply imbalance.  Of course, we see this real time here in Australia, but this phenomenon is happening in other developed markets too such as the US, Canada and Europe.  The best part is the listed REITs that own these types of assets are trading well below where is its feasible to build new supply – giving investors great downside protection which offering medium term upside gains.

Elsewhere, as populations age, seniors housing accommodation is becoming more important. “The sector is needs-based and relatively immune to economic conditions. And despite an expected surge in demand, net new supply is at a cyclical low due to high construction costs. We expect a rise in occupancies, enhanced pricing power and ultimately, more robust earnings growth from experienced leading senior housing providers,” he said.

Another area where Mr Bedingfield sees upside is in the retail sector. “Since COVID, the recovery in in-store retail sales remains well above the prior pandemic trend, with in-place rents still largely reflecting a pre-COVID world. As landlords continue to mark rents back up to economic reality where inflation is higher and foot traffic in malls remains robust, we expect good financial results from the best malls in 2024,” he said.

Over the longer term, global REITs have delivered handsome returns to investors, and are likely to continue to do so, according to Mr Bedingfield. “Importantly, REITs offer investors earnings defensive qualities as they achieve a high proportion of their returns from income sourced from rents, which provides a regular income stream to investors. Rents too are typically linked to inflation, a link which bonds and term deposits mostly lack. Listed property also has a low correlation of returns with those of other equities and fixed income investments over the long term.

“Reflecting this, global REITs have performed strongly for investors so far this century, as global real estate ranks in the top three asset classes nine times versus global equities (five times), and Australian equities (eight times), as the chart below shows, ” he said.

Mr Bedingfield is cautious on industrial property, which has benefited from more tailwinds in recent times including the secular growth in e-commerce, COVID and lockdowns; these headwinds are now diminishing as the world has returned to more normal times. “Industrial investment success is a double-edge sword, as with investment demand comes the incentive to build a new supply. We have seen substantial new supply and although landlords currently believe this pipeline is manageable, the greater supply could put downward pressure on rents,” he said.

More broadly, given the huge diversity of property assets on offer globally, investors need to note the advantage of global REITs over Australian REITs. “While the Australian listed property market is dominated by a few big property trusts, the global listed property market is more diversified and includes some sectors that are not readily available in Australia such residential rental properties and senior accommodation providers.”

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