As investors position their portfolios for greater geopolitical and economic uncertainty, real estate investment trusts (REITs) are well positioned to potentially outperform alternatives, underpinned by undemanding valuations and solid fundamentals, while some REITs may even benefit from the impact of US trade tariffs and inflation in construction costs, according to Matthew Sgrizzi, CIO and portfolio manager at LaSalle Investment Management Securities.
According to Sgrizzi, global real estate is well positioned to weather the current environment for three key reasons. First, real estate possesses inherent structural characteristics that provide resilience. Values are underpinned by defensive and durable cash flows, often secured by long commercial leases.
“In addition, REITs may benefit from any rise in construction costs. US tariffs are likely to drive up the cost of construction in any country that raises tariffs on key construction inputs, and that could push up the rents required to justify new development in numerous locations where tariffs have an impact, which could favour REITs with existing assets.
"Second, these structural factors are reinforced by mostly healthy conditions in global real estate markets. Falling supply levels, a repricing process, and conservative overall leverage levels in most segments of global REITs could all favour the performance of global real estate in the months and years to come, despite growing uncertainties around global trade and geopolitical uncertainties arising from ongoing wars.
"Third, real estate valuations appear undemanding and less stretched than those of several other major asset classes, especially large-cap equities. Real estate has underperformed general equities in recent years, cumulatively underperforming by around 30 per cent since the end of 2021. As the environment has shifted, it is possible that real estate’s underperformance could reverse over the short to medium term and REITs could potentially outperform equities which are facing increased volatility given the new government in the US and rising geopolitical tension,” he said.
According to Sgrizzi sectors like industrial and logistics real estate are likely most directly affected by US trade tariffs, but that the impact may be short-lived.
“Thankfully, the long-term context of logistics real estate is one of positive structural growth, which means this impact takes the form of a downgrading, not a devastation, of the sector’s prospects. Moreover, in the long run, global economic fragmentation could lead to greater supply chain redundancy and therefore increased aggregate space demand,” he said.
Other examples of real estate sectors facing impacts directly tied to tariffs include US power centres exposed to discretionary expenditure on largely imported goods. “There are also potential direct impacts on real estate from other Trump policies beyond tariffs, for example around reputational issues that seem to be suppressing inbound and outbound tourism, as well as changes to scientific research funding,” said Sgrizzi.
“Sectors with a high degree of economic sensitivity, such as hotels could also be impacted, and are likely to see an outsized negative hit to demand in the event of an economic downturn. Meanwhile, economic impacts should be limited for sectors with low fundamental sensitivity to GDP growth, such as medical offices, cell towers and data centres.
Relative impacts are potentially the reverse for sectors with a high degree of interest rate sensitivity said Sgrizzi.
“An economic downturn usually leads to lower interest rates – although recent market movements suggest that is not necessarily a given. The impact of lower rates on the more interest-rate sensitive parts of the real estate market could enable them to absorb some or even al
