After a strong July, global listed real estate is now 3.8% higher for 2024 in EUR, lagging the wider global equity market by around 10 percentage points year-to-date[1]. The US enjoyed a particularly strong summer with REITs rising over 5% as it now seems inevitable that the Federal Reserve will finally begin cutting interest rates in September[2]. With European property markets also improving and delivering positive returns in 2024 – including Scandinavia which experienced some of the worst recent losses – investors are increasingly hopeful that global real estate has finally turned a corner.
Since interest rates began rising in 2022, share prices have largely been on a downward path, both in absolute terms and relative to broader equities. Now, with expectations for borrowing costs in the US and Europe to fall by 2.0% and 1.2%, respectively, over the next 12 months, a positive reversal could well be underway[3].
Listed property has historically outperformed both equities and private real estate once central banks change course, with US REITs delivering 20% annualised returns on average since 1990, 12 months after the end of a tightening cycle[2].
Another important driver of future returns is valuation, and recent macro headwinds mean that real estate is now trading at a 35% discount to the broader stock market on a book value basis – a level last seen at the depths of 2008 financial crisis when the outlook, particularly for real estate, was far darker than it is today. Compared to the current sky-high valuations of US technology stocks, the gap is even wider and there are signs that real estate has benefitted in recent weeks as investors have rotated away from pricier growth stocks into cheaper value ones.
Although expectations for lower interest rates are already priced into valuations to some extent, they generally remain below listed real estate’s own long-term averages. Share prices should also receive a boost once central banks start cutting and companies begin to take advantage of easier credit to fund growth, either organically or via M&A. Further momentum is likely to come from solid economic expansion in the US and Europe this year and next, which will boost occupancy rates at the same time that financing costs fall.
Positive portfolio positioning
SKAGEN m2 has climbed 1.8% in EUR for 2024 and is ahead of its benchmark over one-, five- and ten-year periods thanks to continued good stock selection. The fund is also well-placed to take advantage of improving macro conditions with the portfolio skewed to benefit from falling interest rates and around a fifth of assets invested in sub-sectors that should outperform as the economy recovers such as office, retail, hospitality and housing.
Four companies have joined the fund this year – Helios Towers, Nexity, Public Property Invest and Prosma Fastigheter – taking the portfolio to 31 positions, which are diversified across segments, countries and economic drivers. Our holdings’ balance sheets are also solid with low interest coverage and loan-to-value ratios, while the portfolio is also cheaper than the market on most valuation metrics.
Looking ahead, the usage for assets like offices has likely changed forever following the pandemic, but most long-term structural drivers of property markets such as urbanisation and sustainability remain intact, while others like digitalisation have gathered pace. With the shorter-term cyclical outlook looking increasingly favourable, it seems that global listed real estate could also be entering a new era of positive investment returns.
[1] As at 21/08/2024 In EUR (MSCI ACWI Real Estate v. MSCI ACWI).
[2] Source: NAREIT.
[3] Source: Kepler Chevreaux as t 13/08/2024.