November 18 2022
Market Commentary
After what has been the toughest year for global real estate since 2020, REITs posted a positive return of over 3% for October, this after their only other positive monthly performance in July. With the rate of tightening monetary policies not indicated to be slowing, some of the late October gains were reversed.
While inflation is still a very real concern for markets, it is important to remember how REITs have been impacted in the past. When comparing REIT returns to the Equity market, Global REITs outperformed the MSCI World Index by 5% since 2021. This is with inflation running well above long-term trends.
Meaningful REIT Allocations
If you don’t believe us, believe Morningstar. They did a study in September this year and found that the optimal allocation to REITs ranges from 5 to 18%. They further reported that the inclusion of REITs in a portfolio may increase the return for a given level of risk. Looking at the table below, a moderate portfolio targeting a 10% standard deviation and a 4.1% return allocates 10.3% to REITS, and an aggressive portfolio targeting a 14% standard deviation and a close to 5% return allocates 18% to REITs.
Since the Morningstar analysis focussed on the optimal allocation to US REITs from the viewpoint of an US resident, we did our own study for South African based investors. We considered SA Equities, SA Bonds, SA Cash, SA Property, Global Equities, Global Bonds and Global REITs in our review and applied minimal constraints to overall asset allocation ranges.
The excerpt below shows that the optimal allocation is somewhere between 12% and ~22% depending on whether the investors aim is to minimise risk or maximise the return relative to the amount of risk taken.
Real estate has distinctive characteristics that make this asset class worthy of a meaningful allocation in portfolios, not least of which is their historical returns where, since 1991 US REITs have averaged 11.1% per year in USD (US stocks have averaged 11%).
The other characteristics worth noting are dividend yields and diversification. Over the last couple of years yields have been between 2.75 and 3.25%. With the drop in share prices this year, as well as dividend increase announcements over the last three quarters, our fund yield is currently sitting over 4.0%. Our expectations for earnings and dividend growth over the next three years remain in the high-single digit range.
The diversification benefits are strong with correlations to stocks at 0.26 over a rolling 5-year period. This bodes well, as we believe property is a long-term investment.
Outlook
We are looking for companies with strong balance sheets, high pricing power and companies in needs-based sectors, that are less sensitive to economic growth with secular demand drivers.
Our highest convictions are currently in the residential and specialised sectors. The housing market in the US is grossly undersupplied. Currently they require somewhere in the region of 3.5 to 5 million units. Coupled with this is the fact that housing affordability is the lowest it’s been in 3 decades. Mortgage rates have more than doubled since this time last year from 3 to 7%.
While we expect interest expense to become a headwind to earnings growth, the companies that we look at have very low leverage, with fixed debt exposure and very little near term refinancing risk. Due to this we are of the belief that we can expect very good earnings from these companies over the next number of years.
We believe it is a good time to re-evaluate allocations. Globally REITs are trading at very attractive valuations, in the US at 15% discounts to NAV and 30% in the UK & Europe. The time seems appropriate for patient investors to allocate or increase their allocations. We believe that these investors will likely see very strong returns in the next three to five years.
If you would like to set up time to speak to us or for more information on any of our funds please contact [email protected] / 082 676 6115.
Disclaimer
Although all precautions have been made to ensure the reliability of data and information contained in this presentation, Reitway cannot guarantee the reliability thereof. Past performance referred to in this presentation is not necessarily indicative of future performance. Similarly, forecasts contained in this presentation involve risks and uncertainties which may result in future performance, outcomes and results which differ materially from such forecasts. You are accordingly cautioned not to place undue reliance on any historical data, general information or forecasts used in this presentation.
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Reitway Global (Pty) Ltd
Registration No: 2011/125542/07. A Financial Services Provider licensed under the Financial Advisory and Intermediary Services Act, 37 of 2002. FSP license No: 43747. The full details and basis of the awards are available from the manager
Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002 and is a full member of the Association for Savings and Investment SA.
Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance. The Manager does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request. BCI reserves the right to close the portfolio to new investors and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application forms, annual or quarterly reports can be obtained from BCI, free of charge.
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Performance figures quoted for the portfolio are from Morningstar, as at the date of this document for a lump sum investment, using NAV-NAV with income reinvested and do not take any upfront manager’s charge into account. Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable, the actual investment date, the date of reinvestment and dividend withholding tax. Past performance referred to in this presentation is not necessarily indicative of future performance.
Investments in foreign securities may include additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information.
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