A nice entry point into REITs
Markets have had a volatility spike during the last week where most of the investment classes have been hit (long bonds, stocks,
gold,
REITs, etc.). This creates a nice entry point into REITs if you are following the sector.
Nothing much has happened in the direct property markets but we see a lot of equity issuance in the listed space (Hamborner REIT, Befimmo, Technopolis, ADO Properties, Cofinimmo etc.). Many of our favorite REITs and property stocks have thus been issuing shares and raising equity recently. Why now? …well, the cost of debt is coming down very fast as we could see when Citycon launched a 10 year corporate bond a few weeks ago at a coupon of 1,25 %.
Then imagine most REITs doing the same, raising equity and debt 50/50 at these levels (Equity at a premium! and long 10year fixed at closer to 1 %!). This will create a situation where we will continue to see NAVs increasing during the coming years. As you can see from the chart below we would like to debunk the myth that you should only try to buy REITs at a discount.
Click to enlarge
Source; (FTSE EPRA/NAREIT Asia Index TR (Black), S&P500 TR (burgundy), FTSE EPRA/NAREIT Developed Index (World, red) and FTSE EPRA/NAREIT Developed Europe Index TR (green), MSCI Daily TR World Index (blue))
REIT’s grow their NAVs and usually next year NAV will be higher than the previous year NAV. REITs have demonstrated this over several decades and shown that they can increase their dividends faster than inflation and that they are able to increase their NAVs at a comparable or even faster pace than opportunistic value add private equity funds. We feel comfortable with current valuations that are slightly on a premium, especially when we look at the market dynamics and the big picture where it just makes sense to increase the “real assets” part in any asset allocation going forward. Also, if REITs continue financing at long term fixed rates it will clearly reduce their exposure to the risk of rising interest rates in the future.
Click to enlarge Source: Charts and data are calculated by UB Real Asset Management Ltd, 2016/09/16
Click to enlarge Performance of UB REIT funds, Source UB Asset Management
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