U.S. REITs

Real estate investment trusts (REITs) provide a liquid traded indirect access to the real estate sector. They are required to distribute 90% of earnings, and are therefore favoured by income seekers. While capital appreciation may be limited, overall the total return over longer periods has typically been similar to or higher than global equities.

The U.S. tends to dominate global REIT indices (60-70% share, and is also the focus for this theme as the most supportive interest rate backdrop is also in the U.S..

Key trends that support the investment case for this theme are:

– Interest Rates: US interest rates are widely expected to have peaked, creating a supportive future backdrop for a yield based asset
– Sector allocation changes: The sector has modernised itself over time, which may not be fully appreciated by the market. The doom and gloom of office spaces has a a negative sentiment impact, whereas its actual allocation in a REIT index or ETF is typically under 10%. Meanwhile new sectors such as data centres, healthcare, storage, cell towers and the like are moving closer to half the average allocation of REITs.
– Recent performance v Equities: Due largely to high rates, the sector has underperformed equities recently e.g. returning c.12% in 2023 vs the S&P 500 c. 24%
– Discount v NAV: Although this is common in REITs and quoted funds such as investment trusts, pricing at a discount to NAV provides downside support
– Bad news in the rear view mirror, mostly: With the negative impact of Covid, high rates, low office occupancy etc. dissipating, the outlook is more optimistic.