Many Investors Miss a Chance to Profit From REIT Instability

What would investors like? A pretty steady and accurate heads-up of when to invest in one thing or another. That can exist in real estate, according to the REIT newsletter from Advisor-Access.com.

The article points to an extensive 2021 study that tracked 22 years of retirement assets valued at $32 trillion. Both REITs and private real estate had about the same amounts of volatility, 18.9% and 17.9% respectively. But the two are frequently out of sync. Often when one is up, the other is down.

The reason is a lag in response to markets. Public markets like REITs can see repricing on a regular basis. Investors take stock of general financial conditions — like rising financing rates, for example — and react in real time. Private markets, though, depend on price discovery through transactions. This mechanism can take longer to outwardly register changes.

“This phenomenon has historically resulted in the private market peaking while the REIT market is concurrently bottoming, creating an opportunity for tactically reallocating capital between private and public real estate exposures,” the site noted. “In fact, looking at quarterly total returns since 1978, after the REIT market bottoms, the historical outperformance of REITs versus ODCE (NCREIF Open-End Diversified Core Equity private real estate markets index) funds one year forward has been 42.8%. Even excluding the outsized impact of the Global Financial Crisis, the outperformance of REITs versus ODCE funds one year forward after the bottom has been 26.2%.”

Since the late 1990s, REITs have seen a 15% or greater discount to net asset values seven times. Six of those times, they eventually showed “extraordinarily strong returns.” The seventh time was after in 2007 during the global financial crisis, during which they had taken on extensive leverage, with debt-to-asset ratios of 46%. Today, the amount is 29%, so different circumstances.

“As of July 2022, REITs were trading at a 19.4% discount to NAV,” they wrote. “The average total return following such a deep discount period historically was 33% after one year and 62% after three years. Thus, we see opportunity ahead for significant REIT price appreciation.”

That, of course, should be received with the usual earning that past performance is no guarantee of future results. Although this is not the global financial crisis, the current period is far from “normal.” For example, there are still immense amounts of money sitting on the sidelines, interest rates are likely to continue to climb for some period of time, the future of office properties is far from certain, and other property types could face downward pressures on rents and potentially increasing cap rates.