Listed REITs offer buying opportunity, analyst says

With the market for listed real estate investment trusts at historic lows, financial advisors may want to dust off the real estate allocation in clients' portfolios and begin to expand that position.

That's according to Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers, an investment manager focused on real estate securities like listed REITs and private funds that are not listed.

"We’re a big believer that listed real estate is a leading indicator for the private markets," said Hill, who was speaking on the sidelines at the Schwab Impact conference in Philadelphia Wednesday. "Listed real estate is down 32% from its peak, Dec. 31, 2021. It’s been a bumpy ride.

“2022 was one of the worst years ever, and 2023 has been volatile, to say the least," he said. "Listed REITs are bouncing around the bottom.

“We think this is the attractive opportunity to buy listed REITs and are starting to pound the table a little bit about listed REITs," Hill said. "That's because the valuations have reset so much over the past three months."

Some financial advisors who bought nontraded REITs over the past several years have likely had to deal with questions from clients this year about the investments' performance.

At the close of 2022, REITs including the Blackstone Real Estate Income Trust Inc. and the Starwood Real Estate Income Trust Inc. hit snags, informing some investors looking to pull money out of the REIT through redemptions that they had hit their limits. Those investors needed to get back in line and wait to sell back their shares in the REITs.

The pitch for nontraded REITs, past or present, has always been simple: They are a way for clients to diversify their portfolios, invest in commercial real estate and reap steady yields.

But the opportunity for financial advisors right now is in listed REITs, Hill said, with the valuations of private real estate funds and nontraded REITs not having fallen as far and fast as their counterparts that trade and price daily.

“Look, valuations are down 30%," he said. "This has only happened post 2008 and post early 1990s. It is an opportunity that does not come along very often. The market is dismissing the opportunity to add listed REITs to private portfolios and how that smooths out returns over time.

"Six months ago, I would have been telling investors, 'Hey, if you have three chips, play one of them now, play the next when things feel really bad, and play the third when you have clearly missed the bottom,'" Hill said. "We’re not good market timers, but valuations are getting to a level where they are attractive."

He added that capitalization rates, a measure of real estate yields, also favor publicly traded REIT right now. The higher the cap rate, the better the potential yield of the investments.

“Listed REITs are trading at implied cap rates of 6.3%," Hill said. "That’s significantly higher than they were 12 or 24 months ago, or 200 basis points higher."

Meanwhile open-ended real estate funds, as measured by the NCREIF Fund Index, still have cap rates of close to 4.2%, he noted.

"There’s a huge gap," Hill said. "The cap rate is the return you’re going to achieve without any growth. You want to have the cap rate when it’s highest.”