Economic uncertainty in the US market that began in 2022 created a difficult situation for REIT share prices that continued in 2023 as well. For example, you can see the 10-year treasury yield increased about 3% while the cap rates of REITs grew from 4.5% to 6.5%.
Adding to it, the share prices of REITs failed by 21.4% from the beginning of 2022 to December 1st, 2023. This is indeed a shocking statement.
However, there are hopeful signs for REIT recovery in 2024 and beyond. This shows investment in REIT and understanding REIT & how do it works? in the coming year can turn out to be fruitful.
The valuation divergence between private real estate and REITs will likely continue in 2024, making it an attractive option for investors.
Further solid balance sheets will allow REITs to navigate ongoing economic consultancy while offering a greater advantage in terms of growth and acquisition.
Are REITs often outperforming after the tightening cycle ends?
The rising interest rate over the last few months has created a large headwind for real estate.
When compared to equities and private real estate, REITs have indeed borne the difficulties of the valuation declines.
As the Federal Reserve is near the end of its interest rate hike cycle, looking at how public real estate equity markets and private real estate have performed after previous Fed tightening cycles offers a better outlook on how these markets will perform in 2024.
It is quite evident that Fed tightening cycles marge inflation points in the economy and the financial markets. Each of these policy tightening cycles has come up with a unique backdrop and has resulted in a better cycle for REITs.
However, it is crucial to note that the current tightening cycle may not be complete as there is still the possibility of another hike rate before the year ends.
If you consider all the starts and the results of previous Fed tightening, it is quite evident that REITs experienced relative total return underperformance during the tightening cycles.
In contrast, they outperformed both equities and private real estate across each of the post-cycle types.
Further, the reviews also state a distinct pecking order. REITs hit total returns were the highest, followed by equity returns. Also, there are private real estate returns that make debt a better option.
Through the past performance one can easily understand what will happen in the near future. But it is definitely not fixed.
For instance, although the past performance is not indicative of public equity, REITs have historically enjoyed a great increase in the total return performance after the monetary policy tightening cycle.
So, choosing between REITS & real estate investing and considering an investment in REIT during the next year can actually turn out to be extra beneficial.
Valuation convergence can make REITs more attractive.
A major point to note before an investment in REIT is the divergence between private real estate and US public estate valuations of the last two years.
However, it is expected that the gap will close in 2024, which will make REITS an extremely attractive option. Further, the valuation divergence can clearly be seen with the differences in capitalization rate.
Currently, public real estate cap rates remain to be higher than their private counterparts.
Despite ten years of treasury yield search and the corresponding material increase in REIT property debt rates and private real estate gap rates, the private appraisal cap rates have only increased to a bare minimum.
Private real estate investors actually find comfort in the modest cap rate appraisal and the modest declines in the appraisal property value. However, these attachments provide a false sense of security as they clearly fail to reflect the market realities.
If you consider closely the data from the Nareit Total REIT industry tracker series and the National Council of Real Estate Investment Fiduciaries, you will clearly see the property valuation adjustment process progress.
No doubt the valuation adjustment process has been quite slow, but the REIT implied cap rate remained consistent over the last four decades and was close enough to over 6%.
Now, the gap between NCRAIF and REIT implied open-end diversified core equity transaction cap rates that have been attempting to close.
However, the private transaction cap rate has been quite a fickle metric because of the transaction lack.
During 2023, the volume of quarterly ODC transaction market value averaged 0.5%. While the private appraisal cap rate has experienced measures and possibly managed to increase since the 3rd quarter of 2022.
Here, the modest increase in the appraisal cap rate has clearly acknowledged the valuation property problem.
However, they have clearly failed to address the severity that comes with the substantial cost, including limiting transactions, market price discovery process, and obliging investors to pay artificially high investment management fees.
Possible for the write-downs of private real estate valuations
As per the 2023 3rd quarters, the REITs clearly implied, and the appraisal cap rate spread has remained quite wide. This happened as the property appraisals have slowed down to make adjustments to the current market condition.
This can cause serious disparities between today’s private and public real estate valuations. However, the potential valuation impact associated with the appraisal cap rates and transactions moving to the REIT is significant, or this equal closing the area.
The employee transaction gap would require huge private value write-downs of more than 25%, while there should also be a decline that would need to exit 30% to eliminate REIT implied appraisal spread.
Although the valuation adjustments clearly represent the extreme scenarios, significant appraisal cap rates and a rise in transactions are warranted. Further, there is also material written down that is likely to be on the horizon for the private real estate market.
The preceding analysis of public and private real estate cap rates clearly demonstrates that REITs implied and the private cap rate will likely close in 2024.
As a result, the private real estate value will decline associated with this convergence and will increase REITs attractiveness because they will be more accurately reflecting current market valuations.
A disciplined REIT balance sheet offers a better competitive advantage.
The CRE mortgage market has seen higher interest rates and stricter underwriting standards during the last few years, and the US public equity REITs have not been immune to it well.
Data from the Nareit T tracker of the 3rd quarter of inventory clearly indicates that they have limited exposure to these challenges by maintaining low leverage ratios and by focusing on unsecured debt and fixed rates.
The average REIT leverage ratio during the 3rd quarter was found to be around 36%. This shows the balance sheet strength and access to the capital market will position them to make more acquisitions. This will happen as the transaction volume will slip on increasing within 2024.
There has been a lot of analysis done to understand the performance of REIT in the coming year. If you see the 10-year treasury show that kept on increasing marginally, the debt costs have increased marginally. In simple words, REITs notably increased unsecured debt and fixed rates over the period.
On average, the percentage of total debt of a fixed rate for US public equity was about 90.9%. This high commitment to fixed-rate debt highlights the long-term investment perspective of REIT.
REIT used to be an unsecured debt that has now grown consistently since 2013, reaching 79.3% of the total debt in the 2023 3rd quarter.
Besides this, 9 of the 13 REIT property sectors are unsecured to the total debt percentage, which is greater than 75%. This is unsurprising given that more than 85% of the public equity REITs have investment-grade bond ratings.
While the loan average policy is clearly focused on unsecured debt and fixed rates with longer-term maturities, the REIT balance sheet is clearly helping in handling the tighter credit conditions and higher interest rates.
These discipline balance sheets have also made REITs well-prepared for market uncertainties while saving the way for better opportunities in real estate acquisitions.
However, if looking into 2024 and beyond, it is quite clearly evident that REITs will form well. It will offer attractive pricing with converging valuations. Thus, investors will have a great opportunity here.
However, it is crucial to understand that one needs to do research about the total available options there are various overlooked commercial investments most of the investors ignore and then compare it well to make the right investment.
No doubt it is a trial-and-error method, but with a proper understanding of the market and deep analysis, one will be able to put the money in the right place and guarantee better returns in the future.
Investing in REITs: How to Get Started and Maximize Returns
REITs or Real Estate Investment Trusts enable you to invest in property without necessarily owning a building. Private Capital Investors can assist with the investment decision.
Private Capital Investors provides consulting services. They always hold your hand throughout the entire process. It is not compulsory for you to be a financial genius. They understand the concept of handling your cash and making it multiply.
Below are some steps on how to begin and obtain the optimum yields on such investment.
Getting Started with REITs
First, learn about REITs. They invest in or buy property which generates income. The share that you acquire when you purchase shares entitles you to a portion of the rent or mortgage income.
Choosing the Right REIT
Invest only in the type of REITs that invest in the kind of properties that you need for your business. Some own hotels, others own malls.
Buying REITs
REITs can be purchased via a broker or through an online trading service. It’s like buying stocks.
Maximizing Your Returns
To maximize your profits, invest your profits back. Moreover, select REITs that have had good returns in the past.
Diversify Your Investment
One should avoid investing all their money in a single REIT. It is advisable to purchase different types of investments in order to diversify the risk.
Stay Informed
Stay relevant in the real estate market. This saves you from making wrong decisions.
Conclusion
If you are hoping to put your investment in REITs in the coming year, then this is your opportunity to make the most of it. There will be a huge chance available to grow.
Now, if you need professional support in the process, whether it be for financing or any guidance, then you can consider relying on Private Capital Investors.
Their professionals will be there to offer you insights and the right strategies to help you grow. They will help you get the financing on time so that you are able to make most of the available opportunity at hand on time.
Investing in REITs is convenient and could be rewarding. Below are the steps that can be followed, to begin with and fully capitalize on it.
Start investing today at Private Capital Investors. It is their team’s pleasure to help you achieve your goals. As you will read here, you can rely on their advice to manage your money and enhance your wealth.
