Nareit and its partners in the Real Estate Equity Securitization Alliance (REESA) focus on ensuring the continued growth of REITs and publicly listed real estate businesses across the globe.
Formed in 2006, REESA members work across their regional markets to educate and inform investors and policymakers on the benefits of REIT and securitized real estate equity investment. Today, those efforts are reflected in the fact that 41 countries and regions have adopted the REIT approach to real estate investment.
REIT.com recently spoke with the heads of the seven REESA associations to gauge current developments in their respective markets and what they consider to be some of the main priorities going forward.
Sigrid Zialcita, CEO, Asia Pacific Real Assets Association (APREA)
Amid a rapidly turning macroeconomic environment, REIT IPOs in the Asia Pacific region pulled back in 2022. However, China and India remain bright spots as authorities continued to add shape to the REIT landscape, driven by a need to modernize their respective property and capital markets.
Last year ticked off another milestone in the ongoing evolution in the region, as China's first batch of rental property REITs went public in August. This has given authorities a green light to plot the next stage for the continued evolution of C-REITs, with officials hinting that the program could be expanded to include additional commercial real estate sectors.
This year, the Chinese government will kick off a pilot program to establish the country’s first private equity real estate investment vehicles. In India, Blackstone-backed Nexus Select Trust has filed a draft prospectus to launch India’s first REIT backed by retail properties.
As investors review their strategies in a rapidly evolving environment, real estate markets in the region are experiencing a period of transition. In a rising rate environment and surging inflationary pressures, identifying sectors that are structurally undersupplied with the right long-term demand fundamentals that generate positive rental reversions will be crucial in sustaining real returns.
New economy assets are at the forefront of the region’s digitalization and demographic trends. Layering in climate change concerns adds a further dimension to the idea of new economy assets. As investors turn more selective, real estate fundamentals will come into focus. ESG compliance remains a critical part of this equation, as regulations and occupier demand create an urgent need for investors to rebalance and future-proof their portfolios.
With continued positive developments in various REIT regimes across the region, APREA will continue to work with regulators on pushing for conducive policies to accelerate the growth of REITs across the region.
While we are operating from a position of progress, we have a great deal of work ahead of us. We will continue to strengthen the APREA platform by expanding our investor outreach in 2023, with the objective of gaining a deeper understanding of real assets investment opportunities including REITs across the region, continuing our focus on ESG, forging business contacts, and building rapport with other members across the world for future collaboration.
Nobuhiro Naitou, Executive Managing Director, The Association for Real Estate Securitization (ARES)
J-REIT stock prices, reflected by the TSE REIT Index, are currently in an adjustment phase due to an anticipated rise in long-term interest rates and the possibility of a change in the Bank of Japan's monetary easing policy.
By sector, office remains slow as occupancy rates as well as rents have been softening slightly, while logistics and residential have been generally solid; retail and hotel/lodging, which were severely impacted by COVID-19, have been recovering after the easing of restrictions on peoples’ activities and the Japanese government border measures. As for private REITs, investor demand remains strong, and there is continued activity in the formation of new private REITs.
The Japanese economy is expected to continue to recover gradually in 2023, having a positive impact on the overall J-REIT sector. In the meantime, our concerns are the risk of rising interest rates due to policy changes caused by the change of the Bank of Japan's governor, while trends in energy and resource prices will be factors that might increase volatility in the market.
Regarding investor sentiment, institutional investors seem to remain highly interested in real estate as an investment target that offers stable and relatively decent yields. As for retail investors, the recent government announcement of revising the NISA program, a preferential taxation exemption scheme for investment by individuals, is expected to provide a boost for investor sentiment starting next year. Since NISA is now valid for only limited years and needs to be renewed each time it expires, making it permanent and further expanding the whole system is positive news. ARES will also strengthen its approach to the retail investor segment by taking advantage of this opportunity.
Furthermore, as market demands for enhanced ESG initiatives and disclosure increases, ARES will continue to strengthen its support for its members. In addition, to commemorate the 20th anniversary of ARES, which was in December 2022, we are planning to launch a new ESG award to recognize outstanding ESG initiatives of our members. Through activities such as these, we hope to contribute to the further development of the J-REIT market in various ways.
Melanie Leech, Chief Executive, British Property Federation
The British Property Federation represents all those with a stake in real estate in the U.K.—owners, developers, funders (equity and debt), agents, and advisers. We surveyed over 100 industry leaders at the start of 2023. The results show that the property sector expects 2023 to be a challenging year, with only 10% positive on the short-term outlook. Over half (56%) identified inflation and the increase in build costs, 41% highlighted cost of debt, and just over a fifth (21%) cited the current planning system as current business risks.
However the industry is more positive on the longer-term outlook, with 77% confident in the performance of U.K. real estate over the next five-year cycle. The survey results suggest a split between emerging ‘alternative’ sectors and ‘traditional’ real estate asset classes over the next twelve months.
When asked to identify which (up to three) asset classes would outperform in 2023, almost half (47%) identified life sciences, 42% selected student accommodation, with 41% opting for build-to-rent. Despite recent volatility in pricing, 28% selected logistics to outperform in 2023 with the sector supported by record low vacancy levels and strong underlying demand.
By contrast, respondents were less confident in the short-term performance of traditional workspace, with just 10% picking offices to outperform in 2023. Meanwhile, hotels (7%), town/city center retail (5%), and leisure (3%) were all largely overlooked, with the cost of living crisis likely to impact demand.
Despite a challenging outlook for 2023, the industry remains committed to decarbonisation. Almost half of companies surveyed (49%) plan to accelerate the delivery of their net-zero programs over the next twelve months, with a further 28% expecting to maintain investment at its current level. Just 2% expect to scale back delivery.
Dominique Moerenhout, CEO, European Public Real Estate Association (EPRA)
Last year was a very difficult year for real estate, both listed and non-listed. The situation in Ukraine, high inflation, rising interest rates, and a burning geopolitical landscape put huge pressure on the listed real estate sector. But the sector has demonstrated its resilience thanks to the debt restructuring and decreasing leverage following the great financial crisis.
We hope to see real confidence settle in the market in 2023 and the recovery observed in the financial markets since the beginning of the year mirrors the ability of our sector to bounce back. Current disconnect between share prices and operational performance of the listed real estate sector offers opportunities to investors who wish to further diversify their portfolio with inflation-hedge and ESG credentials.
Our sector is facing many opportunities and challenges in the race to net zero. Buildings are responsible for approximately 40% of energy consumption and 36% of carbon dioxide emissions across Europe. Currently, about 35% of the European Union’s buildings are over 50 years old and over 70% of the building stock is energy inefficient.
At the same time, only about 1% of the building stock is renovated each year. For EPRA, advocacy on EU ESG legislation, both Sustainable Finance and Renovation Wave, will remain a priority for the foreseeable future. At the same time, we will strive to provide guidance to our members in this fast-evolving landscape and accompany them in the implementation of the various main regulations such as the EU taxonomy, Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation (SFDR), and the Energy Performance of Buildings Directive (EPBD).
We will pursue our efforts in advocating for the improvement or creation of a REIT regime where needed, as well as pleading for mutual recognition of REIT regimes across the EU.
Finally, the growth of the European listed real estate sector is also on top of the agenda as reported in a recent EPRA-commissioned research paper. To that end, EPRA is putting in place an initiative aiming at bringing additional variety to the investor base with generalist and equity income investors, in close collaboration with and to the benefit of REESA colleagues.
Steven A. Wechsler, President and CEO, Nareit
In 2022, the U.S. REIT and publicly traded real estate industry demonstrated its resilience in the face of a challenging macroeconomic environment. REITs maintained robust operational performance, with funds from operations reaching $75.7 billion, and they had strong balance sheets, with well-structured, long-term debt and near 20-year lows in levels of leverage. The sharp rise in inflation, higher interest rates, and slowing economic growth took a toll on the public real estate market though, resulting in the largest negative return on the FTSE Nareit All Equity Index since 2009.
In 2023 we continue to grapple with serious economic questions including the impact of higher interest rates and a potential credit contraction caused by concerns about bank balance sheet strength and deposit stability. With a recession or meaningful slowdown in economic activity increasingly likely, the question remains how deeply will this affect REITs and the larger commercial real estate industry? Though we don’t have the answers, we know that REITs’ solid fundamentals and balance sheets going into this year offer reassurance that they are prepared to navigate whatever economic uncertainty lies ahead.
Institutional investors increasingly recognize that those fundamentals well-position REITs for a rebound in the future, and we expect more institutional investors to use REITs over the coming year because of the tactical and strategic opportunities they present. Those strategic opportunities include using REITs to gain sector and geographic diversification to “complete” real estate portfolios.
Turning to the policy landscape, we have a new U.S. Congress this year, and we will continue to ensure that policymakers understand the important role REITs play in the economy here and around the world. One issue that is incurring increasing political debate is the role that sustainability, social responsibility, and corporate governance should play in corporations and financial services.
REITs continue to respond to investors’ interest in enhanced reporting on sustainability, social responsibility, and corporate governance with increased disclosures in these areas. New data from our Nareit dashboard show that in 2022, 100% of the largest 100 U.S. REITs by equity market cap are publicly disclosing their efforts in these areas. Meanwhile, 83% of REITs in the dashboard, by equity market cap, publicly reported their sustainability goals, more than double the share reporting in 2019.
Nareit also remains committed to fostering greater diversity, equity, and inclusion within the REIT and publicly traded real industry, and we will continue to make progress toward that goal through new educational, workforce, and supply chain initiatives that we’re implanting this year.
Mike Zorbas, Chief Executive, Property Council of Australia
Australia has strong economic fundamentals in 2023 that are balanced by external uncertainty and slowing growth for this year before a forecast pick-up in 2024. The Australian economy begins 2023 with unemployment under 4% across a population approaching 27 million people. Net overseas migration will easily exceed 200,000 people this year and overseas students are returning rapidly.
The IMF forecasts growth of 1.6% this year against 3.6% last year. Given our high inflation environment, Australian central bank rate rises will continue for some months. National average house prices are likely to end up 20% down from their peak by the middle of 2023 before picking up again as a lack of overall housing supply puts upward pressure on pricing in 2024.
The cost of debt is up. Rising bond yields have also cooled investment capital flows, creating expectations of a further softening of property valuations. Higher interest rates and inflationary pressures are expected to moderate retail sales growth over the course of 2023. Cap rates are softening but equity will likely flow to real assets once interest and bond rates have peaked sometime in 2023.
At 15%, office vacancy is high by historic standards in the largest cities of Sydney and Melbourne, but this is mainly due to new supply which will be absorbed by growth in coming years. The office leasing market remains challenging, with tenant demand dampened by the adoption of hybrid work arrangements and the expectation of softer economic conditions. The perennial flight to quality means premium office stock will still do well across most cities. Meanwhile, certain assets remain outperformers, with ultra-low vacancy across quality logistics assets.
We have focused our thought leadership agenda on three key areas: investment in our cities, which goes to both direct government investment and the ease and cost of international and domestic private sector investment; the affordable supply of housing; and, the path to decarbonization and greater resilience for the built environment and the reporting and delivery trajectories supporting that in coming decades.
We also have a strong diversity and inclusion thread running through our work, reflecting the evolution of our industry and the increasing diversity of our members and member organizations.
Michael Brooks, CEO, REALPAC
Last year was a difficult one for Canadian REITs in the face of rapidly rising interest rates in the second half of the year. The S&P TSX Capped REIT Index overall was negative 20.5% for 2022, compared to the TSX Composite Index which was only down 8.7%. Most of that stock value loss occurred in the second half of the year, as interest rates were rapidly rising.
Industrial and multifamily REITs did the best in 2022, with retail and office REITs faring less well. Inflation in Canada, a direct result of our federal government printing money to support the economy during the pandemic, and low interest rates, hit a high of 8.13% on June 30, 2022, well above the Bank of Canada’s inflation target rate of 2%.
Inflation had been creeping up since April 2021. As a result, the Bank of Canada started rapidly increasing interest rates in the spring of 2022 to fight inflation.
With inflation now declining, indeed it was below 6% at the end of January, interest rate increases have very much moderated and indeed may flatline for a while as the Bank of Canada assesses how the economy is doing. Housing starts are still strong, as is employment growth, with Canada allowing almost 1 million immigrants into the country in 2022. House prices have been rapidly falling as a result of higher interest rates, although apartment rents are still rising generally in major cities as a result of excess demand and limited supply.
Given the huge discrepancy between REIT returns in 2022 and those of direct investments, reflected in the 2022 MSCI REALPAC Property Index returns (+2.33%) and MSCI REALPAC Property Fund Index returns (+8.31%), it is widely expected that REITs in Canada will have a rebound year in 2023, particularly as interest rates hopefully start to come back down later on in the year with inflation moderating. It is again expected that industrial and multifamily will be the strongest performing asset classes.
For REALPAC, two main priorities for this year will be working with governments across Canada to increase the supply of purpose built rental and managing the likely tax and regulatory push from indebted municipalities and the federal government.