2024 touted as recovery year for REITs

Is 2024 the year that real estate investment trusts (REITs) bounce back? Principal Asset Management’s Todd Kellenberger believes this year might be the time.

In an analysis released this week, Kellenberger, Principal Asset Management’s REIT Client Portfolio Manager, has suggested that after two years of challenges for REITs the tide may be turning.

“Rising interest rates have posed challenges for REIT stock prices over the last two years, leading to historically large discounts relative to broader equity markets. However, yields peaking has typically been a catalyst for strong REIT market outperformance, and when combined with attractive valuations, the stage looks set for a bounce-back year for REITs,” Kellenberger suggested.

“With interest rates having peaked, prospects for future outperformance in the REIT market appear more favourable,” he said.

He noted that REITs are trading at historically significant discounts relative to broader equity markets, thanks mainly to the interest rate sensitivity of the REIT market.

“While rising yields are a headwind for real estate values, the peaking of long-term real yields has historically been a significant catalyst for REIT market total returns and their relative performance to broader equity indices. As yields declined in late 2023, REITs did indeed rally but are still presenting investors with pronounced valuation discounts.”

Kellenberger said REIT relative valuations also reflected investor concerns about real estate’s challenges—rising financing costs, lower capital availability, outsized debt maturities, and office market struggles.

“However, these concerns are largely misplaced as balance sheet leverage is, on average, below 30%, REIT debt maturities are quite manageable, multiple capital sources, such as equity or unsecured debt, are open, and exposure to U.S. traditional office is below 4%,” he said.

“The combination of peaking yields and attractive relative valuations could deliver a bounce-back year for REITs in 2024, and the durable, long-duration nature of REIT cash flows should provide defensiveness as economic growth slows.”