REITS – “What have you done for me lately?”

04/02/2019

Download

‘Real Matters’ provides the latest insights and thoughts from the Janus Henderson Global Property Equities Team. In the third article in the series, Tim Gibson and Guy Barnard, Co-Heads of Global Property Equities, discuss the recent performance of REITs and the diversification benefits they can provide.

The answer predominantly, is: “Better than all the rest”!

Since the end of September 2018, global real estate investment trusts (REITs) are up 3.2% versus the MSCI World Equities Index’s fall of 8.5%1.

But where do we go from here and what role can listed real estate play for investors?

 
“Don't look back in anger”: how did 2018 end up for global real estate?
 
The FTSE EPRA NAREIT Developed Index fell by 5.6% in 20182. While the absolute numbers may not have overwhelmed, REITs provided valuable diversification benefits to clients, having hit their low for the year in February. They subsequently made modest gains as global growth and reflation expectations unwound and investors sought more defensive, resilient income streams. We expect this trend to continue given greater levels of macro-economic uncertainty and increased volatility in capital markets, such as we saw in 2018.
 
 
US Stock Market Volatility 
 
 
 
Source: Thomson Reuters Datastream, S&P 500 Price Index, 31 December 2016 to 31 December 2018. Past performance is not a guide to future performance.
 
“Another brick in the wall”: diversification, diversification, diversification.
 
The old adage ‘location, location, location’ is certainly true when it comes to property but diversification is also a key benefit of REITs.
 
Global REITs offer equity risk diversification as well as regional diversification, with a geographical split of approximately 50% North America, 30% Asia Pacific and 20% in Europe. This geographic dispersion helps diversify macro risks, including economic conditions, central bank monetary policy and political factors. Real estate is ultimately a highly localised business, with property types, cities and countries operating at varying points in the property cycle. Geographic diversity therefore provides actively managed funds with a larger opportunity set from which to choose attractive investments.
 
While US REITs offer diversification benefits through lower correlations with broader equity markets, international REITs add another layer of diversification benefit, with correspondingly lower correlation to US equities:
 
S&P 500 correlation with...
North American REITs0.75
European REITs0.69
Asian REITs0.63
Source: S&P 500, FTSE EPRA NAREIT North America, Europe, and Asia indices, from 31/12/2005 to 30/09/2018. Past performance is not a guide to future performance. 
 
REITs also have among the lowest sector correlations to technology – particularly during the dot-com peak and again more recently (see chart below) - offering a potential counterbalance to investors who are overweight in the technology sector.
 
Real Estate Equities correlation with Information Technology stocks and relative sector performance (on a rolling 3-year basis):
 
 
Source: Bloomberg, Janus Henderson Investors, as at 31 December 2018. Compares MSCI Real Estate and Information Technology sectors in USD. Red boxes indicate periods of low correlation during the dot-com peak and more recently. Past performance is not a guide to future performance.
 
“The times they are a-changin’”: what about interest rates and their impact on the sector?
 
After several years of relative underperformance versus the broader equity market and often hearing the push back that “REITs struggle in a rising interest rate environment” it now seems likely that the interest rate cycle is peaking in the US - this should be positive for REITs.
 
Moreover, the misconception that the sector is simply acting as a bond proxy is unfounded: the long-term correlation between real estate equities and government bonds is actually close to zero:
 
Correlation 2010 - 2018Global Sovereign BondsGlobal Corporate Bonds
Global Real Estate Equities0.100.53
 
Correlation 1999 - 2018Global Sovereign BondsGlobal Corporate Bonds
Global Real Estate Equities0.010.48
Source: FTSE EPRA Nareit Developed Index as proxy global index for listed real estate. ICE BofAML Global Corporate Index proxy for global corp. Bloomberg Barclays Global Treasury proxy for global sovereigns, 31/12/09 to 31/12/18 and 31/12/98 to 31/12/18. Past performance is not a guide to future performance.

In summary…“Life in the fast lane”?

REITs have provided valuable diversification and return enhancement to investors both recently and over the long term. While their performance cannot always be described as living “life in the fast lane” and may face challenges in a rising interest rate environment, at this point in the economic cycle, relatively defensive and predictable income-orientated companies may prove attractive to many investors.  
 

1 source: Bloomberg, 28/09/18 to 29/01/19, total return in US dollars. Past performance is not a guide to future performance.
2 source: Bloomberg, 29/12/17 to 31/12/18, total return in US dollars. Past performance is not a guide to future performance.
 

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

For promotional purposes.

Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Global Property Equities Fund

Specific risks

Risk rating

Janus Henderson Horizon Global Property Equities Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

Janus Henderson Horizon Pan European Property Equities Fund

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

Risk rating

Share

Important message