December 5, 2022

While the full impact of this year’s market volatility on private real estate may not be fully realized for months until transactions and appraisals resume, the impact on real estate investment trusts was swift and fierce.
In the 12-month period ended June 30, real estate managers’ global assets under management in REIT securities were down 10.9% to $487.6 billion from a 10-year high of $547 billion in 2021. At the same time, managers’ REIT AUM managed for U.S. tax-exempt institutional clients plummeted 18.7% to $102.3 billion, data from Pensions & Investments annual survey show.
The high point for REIT assets managed for U.S. tax-exempt institutional investors was June 30, 2016, when managers reported a combined $135.6 billion.
“While AUM is down because REIT valuations are down year over year, institutional investors are increasingly using REITs to gain access to new property sectors, especially those housing the e-commerce and the digital economy,” said John Worth, Nareit executive vice president of research and investor outreach, in an email.
The FTSE Nareit All Equity index return was -5.89% for the 12 months ended June 30, a massive tumble from the 32.8% return for the 12-month period ended June 30, 2021.
Even so, REIT cash flows were strong. In the second quarter, REIT funds from operations reached an all-time high of $19.6 billion, a 9.8% increase from the first quarter, he said.
Nareit reported that nearly 84% of REITs reported increased funds from operations from a year-earlier second quarter. One reason is that occupancy rates of total REIT-owned properties reached and exceeded pre-pandemic levels for the first time in the second quarter, according to a Nareit report released in August.
The top three managers of worldwide REIT assets retained their position despite losing assets in the 12-month period. Once again, BlackRock Inc. placed in the first spot with $161.1 billion, down 7.8% from $174.7 billion from a year ago; Vanguard Group Inc. was next with $85.2 billion, down 9.1% from $93.7 billion; and Cohen & Steers Inc. was third with $56.6 billion, down 1.2% from $57.3 billion.
The top three REIT managers for U.S. tax-exempt institutional investors also saw their AUM fall in the 12-month period ended June 30. The top three were Dimensional Fund Advisors, reporting $20 billion, down 13.8% from $23.2 billion a year earlier; BlackRock with $14.1 billion, down 17.1% from $17 billion; and Principal at $13.3 billion, down 8.9% from $14.6 billion.
Executives at Cohen & Steers Inc., which also reported a decline in U.S. tax-exempt institutional assets over the survey period, falling 20% to $6 billion as of June 30, attributed a portion of the decline to the market.
Global listed real estate markets were down 20% year-to-date through June 30, said Ji Zhang, New York-based portfolio manager and vice president of Cohen & Steers. The firm’s standard global benchmark, the FTSE EPRA Nareit Developed index, was -20.4% in the first half of the year, she noted.
“We think there’s a disconnect between the public market values compared to private market values because the listed real estate market corrected more than the private markets,” Ms. Zhang said.
On the private side, transactions have slowed, she noted.
“There’s been a bit of a pause in the transactions market,” Ms. Zhang said. “Buyers need a period of stability and certainty before they feel more comfortable investing more capital.”
Comparing the listed real estate markets to the private market net asset values, Cohen & Steers executives concluded that the “public markets are trading at a 5% discount relative to where we think the private markets are today,” she said.
As of June 30, 2022, the listed global universe that Cohen & Steers covers was trading at a 5.8% discount to the estimated total net asset value of privately held real estate, Ms. Zhang said. A month later, as of Aug. 31, that full listed global universe was trading at a 3.1% NAV discount.
The liquidity of the public markets has its pluses and minuses, Ms. Zhang said. The public markets have sold off more than private markets so far this year because people take money off the table, which is much easier to do in the public markets, Ms. Zhang said.
“Certainly, some investors maybe take comfort in the lack of mark to market in the private market,” she said. “In reality, the private market is likely to correct just as much as the public markets have over time.”
In the next 12 to 18 months, Cohen & Steers executives anticipate that private market net asset values will fall about 6.5% on average, with some sectors less impacted and others significantly more impacted, she said.
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