2024’s Signs of Recovery for Real Estate Securities?
11 January 2024
Among them were real estate securities from not just the United States but around the globe, which typically perform well after the end of rate tightening cycles.
The VanEck Global Real Estate UCITS ETF (the “ETF”) is normally seen as a good proxy for public real estate securities. From the 2023 lows touched in late October, it had rallied by almost 20% by the year end as speculation mounted that central banks would reduce rates. In fact, the historical performance of the ETF placed it in the top positions among its potential peer group by 1-month return, as well as 1-, 3-, 5-, and 10-year returns.
| 1M | 1Y | 3Y | 5Y | 10Y | |
| VanEck Global Real Estate UCITS ETF | 10.30% | 12.88% | 2.74% | 3.92% | 3.94% |
| iShares Developed Markets Property Yield UCITS ETF USD (Dist) | 9.98% | 8.93% | 1.14% | 2.69% | 4.08% |
| HSBC FTSE EPRA NAREIT Developed UCITS ETF | 9.53% | 10.01% | 1.41% | 2.96% | 3.65% |
| SPDR® Dow Jones Global Real Estate UCITS ETF | 9.43% | 10.35% | 2.36% | 2.88% | 3.48% |
| Amundi Index Solutions - Amundi Index FTSE EPRA NAREIT Global UCITS ETF DR (D)EUR | 9.42% | 9.73% | 1.19% | 2.83% | |
| Lyxor FTSE Epra/Nareit Global Developed UCITS ETF D EUR Inc | 9.41% | 8.93% | 0.66% | 2.29% | 3.25% |
| Credit Suisse Index Fund (IE) ETF ICAV - CSIF (IE) FTSE EPRA Nareit Developed Grn Bl UCITS ETF B USD | 9.85% | 6.29% | -0.57% | ||
| BNP Paribas Easy FTSE EPRA Nareit Global Developed Green CTB UCITS ETF EUR Capitalisation | 8.90% | 10.62% |
Source: Morningstar Direct. Past performance is not guarantee of future results. Data as of 31 December 2023.
Despite the historical performance, associated risks must be considered before investing in this ETF.
Fed chair Jay Powell set the tone in markets when he remarked that the US benchmark interest rate was “likely at or near its peak for this tightening cycle”. Although the Fed December meeting’s minutes, released in early January, had a more hawkish tone, the stage appears set for at least somewhat lower borrowing rates—which have a disproportionate effect on real estate because its business model depends more on debt than other sectors.
For public real estate securities, and real estate investment trusts (REITs) especially, this led to a welcome burst of positivity after a testing two years when central banks had pushed interest rates higher to quell inflation. Among others, the European Central Bank and Bank of England are also expected to cut rates at some point in 20241.
In its 2024 outlook, Nareit, the association representing REITs investing in the US, noted: “With the Federal Reserve at, or near, the end of its tightening cycle, REITs are well situated for outsized performance in 2024.”2
Historically, US REITs have outperformed both equities as a whole and private real estate during the 12 months after the Fed has stopped increasing rates, according to Nareit’s analysis of the last four full rates cycles (see chart). This has followed REITs’ underperformance during the time that the Fed has been raising rates.
REITs Historically Outperform After Fed Tightening Cycles
Average Total Returns During and After Fed Tightening Cycles
Source: Federal Reserve Board; Nareit; NCREIF; FactSet. Date as of 2023:Q2.
Note: Public equity REITs, private equity real estate, and stock market performances were measured by the FTSE Nareit All Equity Index (FTSE Nareit), the NCREIF Fund Index-Open End.
Diversified Core Equity (NFI-ODCE), and the standard & Poor's 500 (S&P 500), respectively.
But there could be more reasons for optimism. Firstly, a valuation gap has opened up between public and private real estate valuations in the past two years. This is shown by differences between US public and private real estate capitalization rates – calculated by dividing a property’s net operating income by its current market value. That gap is likely to converge in 2024, according to the Nareit outlook, partly as lagging private real estate valuations fall.
Secondly, the companies behind public real estate stocks have solid balance sheets. Unlike in previous cycles, they have tended to have low leverage and high debt coverage, with net operating income providing a greater cushion over interest expenses than at the time of the 2008-2009 global financial crisis.
Shareholders' Equity to Total Assets
Source: S&P Capital IQ Pro, Nareit T-Tracker(R)
Interest Expense to Net Operating Income
Source: S&P Capital IQ Pro, Nareit T-Tracker(R)
Against this backdrop, the picture for real estate securities globally may well be brightening. While the unbridled optimism about interest rates that characterized the end of 2023 has faded somewhat in early 2024, central banks still appear to believe that rates have peaked.
And the optimism about the outlook is far from confined to the US. For instance, the European Public Real Estate Association’s Developers Research Benchmark, which tracks the performance of Europe’s most liquid real estate developer’s shares, rose 16.8% in November 2023 (the most recent data at the time of writing).
It’s also true that house prices are proving resilient in markets like the UK, the Netherlands and Germany. Dirk Wohltorf, President of Germany’s Studie des Immobilienverbands Deutschland real estate association, reportedly expects a recovery in 2024. “Prices will rise when interest rates fall again, but probably not before the fourth quarter of 2024,” he says.
Across the Atlantic, this view is shared by Nareit in its outlook: “Looking to 2024 and beyond, it’s clear that potential total return outperformance, attractive pricing with converging valuations, and solid balance sheets will likely increase the appeal of REITs and offer investors tactical and strategic investment opportunities.
“Though 2022 and 2023 were challenging years for REITs, the recovery is on the horizon.”3
1 Source: FT, https://www.ft.com/content/862f14fd-da31-4e38-8404-e70904a8fd4b
2 Source: Nareit, https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook
3 Source: Nareit, https://www.reit.com/news/blog/market-commentary/2024-reit-market-outlook
IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
For investors in Switzerland: VanEck Switzerland AG, with registered office in Genferstrasse 21, 8002 Zurich, Switzerland, has been appointed as distributor of VanEck´s products in Switzerland by the Management Company. A copy of the latest prospectus, the Articles, the Key Information Document, the annual report and semi-annual report can be found on our website www.vaneck.com or can be obtained free of charge from the representative in Switzerland: First Independent Fund Services Ltd, Feldeggstrasse 12, 8008 Zurich, Switzerland. Swiss paying agent: Helvetische Bank AG, Seefeldstrasse 215, CH-8008 Zürich.
For investors in the UK: VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority (FCA) in the UK, to distribute VanEck´s products to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice.
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Global Real Estate UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Denmak – Facuility Agent: VanEck (Europe) GmbH
Germany - Facility Agent: VanEck (Europe) GmbH
France – Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH
The VanEck Global Real Estate UCITS ETF is not sponsored, promoted, sold or supported in any other manner by Solactive AG and Global Property Research B.V. nor do Solactive AG and Global Property Research B.V. offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade mark or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the VanEck Global Real Estate UCITS ETF, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the VanEck Global Real Estate UCITS ETF.
Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade mark for the purpose of use in connection with the VanEck Global Real Estate UCITS ETF constitutes a recommendation by Solactive AG to invest capital in the VanEck Global Real Estate UCITS ETF nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in the VanEck Global Real Estate UCITS ETF.
It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
