Market backdrop: where do we stand?

In line with his pre-election promises, the market expects President-elect Trump to push through tax cuts for individuals and businesses once in power. While this should boost economic growth, it’s also likely to lead to higher inflation. Indeed, the US 10-year Treasury yield increased from 4.26% on election day to 4.41% on 18 November. At the same time, the listed real estate market experienced increased volatility.

Reasons to be optimistic for the listed real estate market

Yes, higher US real rates aren’t necessarily ideal for the listed real estate market. However, since this move is driven by higher economic growth expectations, we’re more upbeat about the sector’s outlook.

While real rates have increased since the election, real estate investment trust (REIT) debt spreads have tightened. The overall impact on financing costs hasn’t changed – which is crucial for a sector that relies heavily on borrowing.

Net operating income (NOI) growth remains strong, averaging around 3-5% per annum. This should support continued dividend growth.

That said, we may see a divergence in economic performance across regions, as the trajectory of further rates cuts in Europe and the UK could differ from that of the US.

Sector breakdown

In terms of sector performance, areas of the market more closely correlated with rates, such as triple-net-lease REITs and cellphone towers, have underperformed due to expectations of a slower US Federal Reserve cutting cycle. As expected, data centres have outperformed, thanks to the structural support that continues to bolster this area of the market.

Residential and single-family housing has also held up well since the election, and we remain bullish on this area of the market. Increased urbanisation trends and lifestyle choices have supported investment demand. Furthermore, previous concerns around rental controls have disappeared following the election.

The outlook for the retail sector in the US (retail parks, shopping centres, strip centres) has improved, with consumers set to benefit from Trump’s tax cuts. However, the picture is not necessarily the same in the UK, so investors must consider geographic differences when allocating capital.

Office performance remains polarised, with asset-specific considerations and local-market dynamics driving overall performance. For example, expectations are high that the Trump administration will be more dynamic. This could force people back into offices and lead to elevated leasing volumes for the next six months. East-coast offices remain exorbitant, particularly when considering capital expenditure, and therefore remain unattractive.

Given the nuances at the sector, country and regional level, we advocate an active approach to the asset class.

Favourable backdrop for global REITs driving a switch to expansion and growth strategies

Generalist investors have stepped back slightly from the asset class since the election, having previously bought on the rates trade. Nonetheless, we remain bullish on REITs when looking at the underlying real estate fundamentals.

Many REITs have strengthened their balance sheets over recent years, enabling them to raise capital in the unsecured debt markets. This provides a competitive advantage over private market peers who rely more heavily on bank lending, which has become more difficult to source.

This capital dislocation has created attractive merger-and-acquisition and asset-level opportunities for REITs, allowing many to deploy capital at the bottom of the market and grow both organically and inorganically.

Final thoughts…

Listed real estate shares are down slightly since President-elect Trump’s victory. Despite this short-term setback, we remain optimistic about the long-term outlook. The impact on financing costs remains unchanged and NOI growth is strong. While we wait to see the eventual shape of Trump’s policies, we believe the impact will vary across sectors and geographies. An active investment approach is therefore warranted.