In a nutshell:
- Rising interest rates and economic uncertainty have cast a pall over financial markets.
- While real estate is not immune to these forces, it can benefit, in our view, from its ability to hedge inflation.
- We believe that the current macro environment calls for an investment strategy centered on Defensive Growth: downside protection with the ability to capture inflationary rents.
Despite surging interest rates and slumping financial markets, real estate displayed positive momentum in the first quarter of 2022. Fundamentals were robust: Vacancies dropped to an all-time low (since 1988), fueling double-digit Net Operating Income (NOI) growth.2 Trading activity was liquid: Transactions of $171 billion were the highest first quarter total since at least 2001.3 Finally, investment performance was buoyant: The fund-level Open-End Diversified Core Equity (ODCE) real estate index delivered the strongest trailing four-quarter total returns (28.5%) in its history (since 1978), while the asset-level NCREIF Property Index (NPI) achieved its greatest returns (21.9%) since 1980.4
There were some hints of deceleration. On a sequential basis, ODCE and NPI total returns slipped to 7.4% and 5.3%, respectively, from 8% and 6.2% in the final quarter of 2021.5 NOI growth of 10.5% (year-over-year) was also down from 12.4% the previous quarter.6 Nevertheless, the first quarter of 2022 was an exceptionally strong start to the year.
In the ensuing months, real estate practitioners have reported signs of softness, including slimmer bidding pools and rising cap rates. Listed REITs have sold off (down 20.3% year-to-date through June)7 alongside the broader stock market.
However, REITs have slumped before without a corresponding pullback in the private market (e.g., in 1998/99, 2015 and 2018). Indeed, RCA’s repeat-sales price index — which captured the effects of COVID in its earliest days — accelerated through May (see Exhibit 1).8
Exhibit 1: RCA Commercial Property Price Index
Sources: RCA. As of May 2022.
Kevin White, CFA
Global Co-Head of Real Estate Research
1 This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions, and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. Source: DWS International GmbH.
2 NCREIF. As of March 2022.
3 Real Capital Analytics. As of March 2022.
4 NCREIF. As of March 2022.
5 NCREIF. As of March 2022.
6 NCREIF. As of March 2022.
7 MSCI U.S. REIT Gross Total Return Index. As of June 2022.
8 RCA CPPI. As of May 2022.
This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Forecasts are based on assumptions, estimates, opinions, and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. Source: DWS International GmbH.
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