REITs well positioned for a Grand Reopening By: Cohen & Steers

Vaccines, policy and consumer trends are uniting to create opportunities across the real estate landscape, setting up 2021 as a potentially strong “vintage year” for REITs.

Looking to a vaccine-driven recovery

Just as the pandemic upended certain types of real estate in 2020, we believe
progress in vaccine distribution and fiscal stimulus are creating the potential for a Grand Reopening that could directly benefit some of the most impacted REIT sectors.

The U.S. is vaccinating around 2 million people per day, and more Americans have now had their second vaccine dose than have been diagnosed with COVID-19 since the start of the pandemic, prompting officials to begin lifting restrictions.(1) Extraordinary fiscal relief measures are adding to economic recovery expectations, including nearly $2 trillion in new U.S. COVID relief on top of $3 trillion approved in 2020. With other developed economies also ramping up vaccine distributions, we believe 2021 could offer attractive entry points for allocating to real estate.

(1) At March 8, 2021. Source: U.S. Centers for Disease Control and Prevention.

Attractive value entering an early-cycle environment

REITs appear cheaply valued relative to stocks

After trailing equities by 25% in 2020, global REITs ended the year at their largest relative discounts since the global financial crisis. Although the value gap has narrowed in the early months of 2021, it remains below the historical average
(Exhibit 1). At a time when growth stock valuations are near historical highs, we believe REITs represent an attractive opportunity to diversify portfolios with undervalued, low-correlated assets.

Early-cycle environments tend to favor REITs

Post-recession periods have historically been positive for REIT returns, as these are generally times of accelerating economic growth and supportive monetary and fiscal policies. Since 1991, REITs have outperformed equities in early-cycle expansions on average, both globally and in the United States (Exhibit 2).

An improving economic outlook may drive long-term bond yields higher, raising questions about REITs’ interest-rate sensitivity. Although rising interest rates may create volatility in the short term, we have found that over time, the benefits of stronger real estate demand in an improving economy have outweighed the effects of higher interest rates. We believe REITs today have the added benefit of wide yield spreads to bonds and staggered maturities, which may further cushion the effects of rising rates.

REITs may help defend portfolios against unexpected inflation

For investors concerned about the inflationary effects of large-scale government spending and quantitative easing, real estate offers potential inflation-hedging characteristics. Rising prices for labor, land and materials used in construction can increase the economic threshold for new development. This, in turn, may constrain new supply, supporting higher occupancies and giving landlords greater power to raise rents. As a result, REIT prices have historically responded positively to inflation surprises, compared with the negative impact on stocks and bonds.

Compelling investment themes in the “new-economy normal”

Although shopping malls and offices have been getting most of the headlines during the pandemic, these sectors make up only a small portion of the modern REIT market (Exhibit 3). Today, we are seeing multiple sources of opportunity.

(1) Cohen & Steers estimates, 2/28/2021. (2) Cohen & Steers proprietary analysis, 12/31/2020. (3) Company Reports, 12/31/2020.

Summary

Vaccines

Safer interactions and easing business restrictions should directly benefit certain REIT sectors impacted by the pandemic, while extraordinary fiscal and monetary policy measures are driving expectations for a sustained economic recovery.

Value

REIT earnings multiples remain attractive compared with broad equities entering what has historically been the most favorable phase of the business cycle for REITs. The value proposition is further enhanced by real estate’s inflation-hedging potential.

Variety of opportunity

The modern REIT market offers access to both secular growth themes and cyclical beneficiaries, enhancing the potential for active managers to add value. This is illustrated by the 45% performance gap in 2020 between the global REIT market’s top sector (data centers +18%) and bottom sector (retail –27%) based on the FTSE EPRA Nareit Developed Index.

Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast made in this document will be realized. The views and opinions presented in this document are as of the date of publication and are subject to change without notice. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of appropriateness for investment. Cohen & Steers does not provide investment, tax or legal advice. Please consult with your investment, tax or legal professional regarding your individual circumstances prior to investing.

Risks of investing in real estate securities. Risks of investing in real estate securities are similar to those associated with direct investments in real estate, including falling property values due to increasing vacancies or declining rents resulting from economic, legal, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest rate changes and market recessions. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties, and differences in accounting standards. Some international securities may represent small- and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or the actual returns that may be achieved.

 

Just as the pandemic upended certain types of real estate in 2020, we believe progress in vaccine distribution and fiscal stimulus are creating the potential for a Grand Reopening that could directly benefit some of the most impacted REIT sectors. 

The U.S. is vaccinating around 2 million people per day, and more Americans have now had their second vaccine dose than have been diagnosed with COVID-19 since the start of the pandemic, prompting officials to begin lifting restrictions.(1) Extraordinary fiscal relief measures are adding to economic recovery expectations, including nearly $2 trillion in new U.S. COVID relief on top of $3 trillion approved in 2020. With other developed economies also ramping up vaccine distributions, we believe 2021 could offer attractive entry points for allocating to real estate.

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