Note the divergance between real world and the share prices.
That difference is the opportunity.
The resulting weakness in the stock market has (once again) catalyzed a divergence between the valuations of North American publicly-traded real estate securities and the underwriting of comparable properties in the private market.
Generally, property fundamentals remain strong across the investable universe, evidenced in U.S. REIT earnings revisions continuing to surprise to the upside in the first quarter of 2022, reporting an average increase of 2.9 per cent, as compared to eight out of eleven GICs sectors reporting a decrease in earnings revisions over the same period, and the broader S&P 500 averaging a 1.2 per cent decrease.
With the liftoff of interest rates from the zero-bound across much of the developed world, it is important to reiterate that REITs are dynamic operating platforms that statistically reveal no correlation to the directionality of borrowing costs. Since the Fed’s announcement to begin its current hike cycle on March 16th, U.S. REITs have posted a total return of 3.5 per cent versus the S&P 500’s total return of -4.2 per cent.
A $364 billion wall of capital earmarked for real estate continues to underpin property valuations as M&A transaction volumes remain at elevated levels. The necessity of investing these funds has a positive impact on REITs both directly and indirectly. Indirectly, it boosts demand for the properties in their portfolios, pushing down cap rates and raising NAVs. Directly, it leads to takeovers of public REITs/REOCs.