Slowing rates hikes could spark REIT rebound in 2023: Hazelview report

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Millicent Wong
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Slowing rates hikes could spark REIT rebound in 2023: Hazelview report

In a Global Real Estate Outlook 2023, Hazelview’s Corrado Russo argues that top companies with solid balance sheets and cutting-edge real estate portfolios are performing unusually poorly, even though real estate categories such as self-storage, single-family homes and apartments are structured to protect themselves from rising inflation benefit.

“This year (2022) is on track to be the second-worst performing year since the global REIT era began over 30 years ago,” the report reads. “Only the global financial crisis of 2008 was worse, and only four times (1990, 1992, 1994 and 2008) have global REITs fallen more than 10 percent.”

The report calculates that REIT valuations are now discounted 26 percent and remain 14 percent below their pre-COVID trading levels. In comparison, other global companies are trading nine percent above their February 2020 levels.

“Fundamentals went out the door in 2022 as markets focused on high inflation and tightening monetary policy,” Russo, Hazelview’s senior managing director, said in the report.

“And while this can be frustrating for us as active managers, we know this can present exceptional opportunities in 2023, which we believe will be more about weaker growth, moderate inflation and an end to rate hikes, or a partial reversal .”

In December, the Bank of Canada raised interest rates further by 50 basis points to 4.25 percent – the seventh hike since April in one of the most aggressive tightening cycles in history.

Hazelview portfolio manager Samuel Sahn said it’s “the expectation of rate hikes that hurts REITs the most.”

“Given the uncertainty surrounding the cost of borrowing, it is very difficult for markets to value the underlying properties owned by REITs,” he said in the report. “Rate increases don’t necessarily have to be reversed to change the valuation paradigm, they just have to moderate or stop rising and be more predictable.”

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Although stabilized interest rates are benefiting homebuyers of all stripes, Bank of Montreal economist Robert Kavcic believes a 25 basis point rise in 2023 is still to come.

“We think we’ll see one final move of 25 basis points early next year, and then attention will turn to the more important question for investors to keep in mind: How long will interest rates stay at these hawkish levels? We continue to see rate cuts as a 2024 story,” Kavcic said in a note to clients.

Meanwhile, the forecast suggests that interest rate transparency is likely to positively transform the REIT landscape in 2023.

“Clarity on interest rates … should boost stock price performance and the best-in-class portfolios that have been unfairly penalized should start to stand out again,” the report said.

Hazelview owns and manages $11.6 billion in assets and employs a team of global investment and wealth managers from offices in Toronto, New York, Hamburg and Hong Kong.

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