Global real estate poised to perform going forward

AS THE world recovers and reopens at varying speeds, the real estate industry is transforming and offering new opportunities. While the uncertainty caused by the war in Ukraine and increased rate hike expectations remain wild cards, the worst of the Covid-19 pandemic has passed. Higher interest rates are undoubtedly a concern, but there are good reasons that the tightening cycle will not last long. Inflation should recede from its four-decade high, although stay elevated for some time given the lingering impact of supply-chain disruptions. Real estate is well positioned to perform against this challenging macro backdrop.

Rising rates and reflation

After the global financial crisis, real estate investment trusts (Reits) restructured their debt to strengthen their balance sheets and operating efficiencies. Today, Reits tend to have long term fixed-rate debt, which have largely been locked in at low levels. Additionally, net operating income margins have risen sharply and are now back near pre-pandemic levels. This has reduced their leverage ratios, meaning Reits should be minimally impacted by rising interest rates.

Historically, real estate has demonstrated strong correlation with inflation, particularly in assets with short lease duration and strong operating leverage. Shorter lease duration assets tend to appreciate the most when reflation takes hold, particularly those seeing strong demand, which allows lease holders to pass expenses along to their tenants. Residential properties, which offer inflation protection, are poised to benefit from reflation as improving cost controls and supply or demand imbalances should lead to above consumer price index operating income growth. Other sectors, such as self storage and data centres, have little exposure to wage inflation.