REITs to rise in 2021 as property values ​​rise

They can whisper. The FTSE NAREIT Equity REITs index was up 36% in 2021, compared to 26% for the S&P 500 on December 23, according to real estate analytics firm Green Street. If this trend continues for the rest of the year, 2021 will be the REIT index’s best year since 1976 in terms of absolute performance, Green Street said.

But will the same strategy work again in 2022? Some analysts have warned that investors who plan to double down on this year’s REIT strategy may hold off on buying Dom Pérignon just in case.

For starters, the REIT’s strength this year was partly a rebound after a poor 2020. The sector fell 8% last year, compared to an 18.4% increase for the S&P 500, Green Street, with office, retail and other asset types affected by the pandemic. said.

Next year it is doubtful that this year’s momentum can be maintained. “It’s hard for us to see the group putting a similar year into 2022,” said Steve Sakwa, an analyst at Evercore ISI.

Meanwhile, the REIT sector is under threat. Concerns about the Omicron version of the COVID-19 virus are already undermining hopes that millions of people who have been working from home during the pandemic will return to offices in January.

Shares of REITs, like many other companies, may face a bumpy ride in 2022 from inflation and rising interest rates. “Additional variants, inflation and the risk around interest rates will create significant volatility over the next 12 months,” said a December report on REITs by Evercore ISI.

Certain property types have flourished throughout the pandemic. For example, industrial REITs have reported overall returns of over 40% since the pandemic hit due to a surge in online retail sales, according to analysts.

Analysts said total returns for self-storage landlords increased by more than 80% during the same time frame, as people working from home declined. “The Folks wanted the extra space,” said Michael Mueller, an analyst at JPMorgan Chase & Co. “They cleaned up the bedroom in the back.”

Meanwhile, REITs, which own properties such as office buildings, malls, senior housing and hotels dependent on business travel, have been tracking the ups and downs of the pandemic since early 2020. Their stock declined when new volumes came out and soared with promising news. Comments.

“When you think about 2021, everything started with the vaccine news in November 2020,” said Cedric Lachance, Green Street’s head of research,

The good news about vaccines pushed up the performance and share prices of some REITs faster than expected as 2021 began. For example, demand for rental apartments increased in the first half of 2021 in cities such as New York and San Francisco, which saw an exodus of renters in 2020.

Shoppers also surprised some analysts by returning so quickly to the mall. For example, strong sales helped propel the stock price of Simon Property Group Inc., America’s largest mall owner, above $150 a share, which was trading before the pandemic hit.

The rise in inflation, so far, has been good for REITs as it has helped drive merger and acquisition volumes, as well as sales volume and values ​​of individual properties. Many investors consider real estate to be an inflation hedge because owners can raise rents to stay afloat or at least keep pace with rising prices.

Tony Paolone, analyst at JPMorgan, said, “If the cost of building real estate goes up because of inflation, you don’t have the ability to build up more supply until rents reach a certain level to justify it.” Don’t be.”

But inflation could be painful for highly leveraged asset owners next year if it fuels the cost of increasingly higher interest rates. Inflation and high rates can also lead to an economic slowdown and a drop in demand for many types of assets.

Analysts say the health news will be even more so in 2022 as a wild card for REITs. The bad news will likely hurt property types like offices and senior housing, while experts in data centers helping REITs see strong demand when people are sitting at home streaming movies and TV shows.

Good news will boost malls and hotels. Mr Lachance of Green Street predicted a possible repeat of “revenge spending and revenge travel”, which has happened when infection rates have fallen. To go back on the virus, people “come into malls and buy things because it makes them feel good,” he said.