How to handle real estate in a rising interest rate environment:

Highlights

  • REIT correlations with stocks are at a 16-year low

  • REITs are trading at attractive historical values relative to stocks, bonds and private real estate

  • Demand for private real estate is substantial and growing

Why most small business fail in the last year?

Managers of private equity funds are holding onto a record $250 billion of uninvested capital (“dry powder”) earmarked for real estate (Exhibit 6). Fundraising efforts have increased for 2018, suggesting that this amount is only likely to grow. With the recent underperformance of REITs, private fund managers are warming up to acquisitions through the listed market, particularly for companies trading at deep and sustained discounts.

While we cannot say when REITs will reverse their recent underperformance, we see this as an attractive opportunity to begin legging into higher REIT allocations, taking advantage of low relative valuations, strong diversification potential and robust demand in the private market.