REITs will also see sector rotation
As has been the case for equities, real estate investments trusts (REITs) will see a shift from what worked in the COVID-19 pandemic to what will work in the recovery.
Rick Romano, PGIM Real Estate head of global real estate securities, said while the 2021 growth rates of those COVID-19 darlings might not be as high as recovery plays, it still had good long-term demand.
“Data centres, global logistics, cell towers – all of those companies benefitted from what was going on during the pandemic because cloud usage was up and the demand for streaming services was up,” Romano said.
“Logistics and e-commerce companies pulled forward several years of demand from retail, so while we like the long-term outlook for those groups, we’re very valuation sensitive.
“Earnings growth in 2021 is now going to shift to those companies that were most negatively impacted by the pandemic.”
Romano said there were three tailwinds – reversion, reflation and re-opening – which would direct trends for REITs.
“Reversion is when you look at different sectors in general equity markets across the world, they all outperformed REITs in 2020 for the most part,” Romano said.
“The pandemic really hit at the heart of real estate with retail being closed, hotels being closed and senior housing being shut down.
“All of those contributed to some pretty big underperformance for REITs last year, so what we’re seeing in 2021 is a reversion of that performance, catching up to where general equity markets performed, but still providing great value opportunity.”
Romano said there were also property sectors that had pent-up demand and were waiting to re-open.
“Examples are leisure travel, hotels and senior housing… also pent-up demand for office travel too with people wanting to go out and see clients,” Romano said.
“With reflation, normally the playbook for REITs would be if rates are up, REITS should go down, and that might be true in the mid or late cycle.
“But this is a very unique environment where we’re early cycle and we’re in this re-opening opportunity where you’re going to have REITs that have pent-up demand for their space and they’re going to have pricing power because nothing has been built as everything was halted or slowed down during the pandemic.
“What that means is, rents can go up and dividends for these REITs will ultimately go up.”
According to FE Analytics, over the year to 30 April, 2021, within the Australian Core Strategies universe, the average return in the global equities sector was 25.54% versus 17.2% for the global property sector.
The average return in the Australian equities sector was 32.91% versus 29.91% in the Australian listed property sector and 3.1% in the Australia direct property sector.
Sector returns for Australian and global property and equity sectors over the year to 30 April 2021
AUTHOR
Chris Dastoor
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