It's Been a Bad Year But REITs Could See a Strong 2023

A bad 2022 for REITs could turn into a great 2023, but that if depends on some important factors turning around, says Hazelview Investments’ 2023 Global Public Real Estate Outlook Report. Current significant discounts, with the right tailwinds next year, could “offer significant positive mean reversion.”

“Fundamentals went out the door in 2022 as markets focused on high-inflation and hawkish monetary policy,” a company press release quoted Corrado Russo, senior managing director of investments and head of public real estate investments, as saying. “And, while this can be frustrating for us as active managers, we know this can present exceptional opportunities in 2023 which we believe will be more about weaker growth, moderating inflation, and an end to rate hikes or a partial reversal. The best long-term returns are generated when buying at discounts to intrinsic value and investor sentiment is at its lowest, both of which are true today.”

Hazelview says that 2022 looks to become the second worst year in more than 30 for global REITs. “Only the global financial crisis in 2008 was worse, and only four times (1990, 1992, 1994 and 2008) have global REITs declined by more than 10 per cent,” they said. Currently, REIT valuations are down 26% compared to private real estate (though that gets tricky with transactions down sharply and those being necessary for accuracy). They’re also 14% down from pre-Covid. And, importantly, “The top performers (companies with strong balance sheets, best in class real estate portfolios, superior earnings potential and high-quality cycle tested management teams) and property types that are structured to benefit from rising inflation (apartments, single family rentals and self-storage) performed the worst.”

Hazelview sees that as meaning that the best REITs are “exceptionally cheap.”

What has to happen for valuation lifts? A big one is interest rate stabilization, which isn’t happening yet. The more uncertainty, the more skittish investors get in anticipation of the future and so the more beaten the REITs.

Strong corporate earnings from the REITs could do some real good in the anticipation market. “As a yield-oriented investment product, the prospect of lower earnings sends fear into the market that companies may need to cut their dividends,” Hazelview said. Remove the fear and markets could respond.

And then there are mergers and acquisitions. “In the real estate industry, private investors dwarf the size of the public market, making it ripe for M&A activity,” Hazelview wrote. “These private investors often look to acquire REITs as a way to access larger portfolios.” As there’s still a discount, big investors could step in with offers that could still provide a premium for current owners who would like more liquidity.