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May 26, 2021
  • Special Focus: A dive into the world of REITs
  • Bitcoin’s energy toll raises ESG concerns

This week, we’re casting our eye over the world of Real Estate Investment Trusts, or REITS – what are they and what are some of the ideas behind this asset class?

As the title suggests, REITs are investment vehicles that acquire and, in most cases, operate and finance real estate assets. They were established in the 1960s in the US to give investors, big and small, easier access to the real estate market. Collectively, REITs of all types own more than $3.5 trillion in gross assets across the US, encompassing a wide scope of real estate property types, including offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels.

Often listed and enjoying very high liquidity, REITs also claim an exemption from income tax and are generally tax efficient investment vehicles, making them a highly attractive asset class in the US over the past 60 years. The model is spreading globally and has since been adopted by 40 other countries.

For investors, it’s important to understand where REITs could fit into their portfolio. Historically, REITs demonstrate a correlation of 0.7 with Global Equities and 0.4 with Global Bonds – meaning they are a useful diversifier. Currently, REITs are on average offering a dividend yield of 3.3%, which compares favourably to what you might get from S&P 500 dividend yields.

With inflation angst back, potentially endangering equity and bond investment returns, investors are increasingly seeking out asset class diversification, including real assets, such as commodities, infrastructure and property. Both in terms of total return and dividend growth, REITs outperformed inflation over the past 20to 30 years, except during market crises (notably the Great Financial Crisis, which was triggered by a real estate collapse).

Of note to inflation hawks will be the data showing that, between 1990 and 2020, REITs outperformed equities in periods of moderate to high inflation (ie. >2%). When inflation was below that threshold, equities outperformed.

As this newsletter has reported many times, it’s not yet clear where inflation is headed over the next 12-18 months. But if inflation does head towards persistently higher levels, it could make sense to integrate REITs into a globally diversified portfolio. A number of ETFs and actively managed funds offer opportunities to ensure sectoral and geographical diversification with any investor’s allocation of REITs.

Japan’s deflationary woes deepen

As CPI inflation picks up all around the globe, Japan’s economy appears not to have got the message. Deflation in Japan is actually deepening, with CPI falling to -0.4% in April from -0.2% the previous month. The fall in prices was mainly driven by a lower mobile phone charges, introduced by the Japanese government in April. More concerning for the government will be the news that services inflation showing no sign of accelerating, owing to a recent spike in Covid infections and Japan’s relatively slow vaccine rollout. Japan’s recovery continues to look anaemic after GDP contracted by 1.3% QoQ in the first 3 months of 2021, following a 2.8% increase the previous quarter.

US housing market slowing, as consumer confidence weakens

The US housing market is showing clear signs of slowing. April’s new home sales figures fell to 863k, below the consensus of 950k, after March’s figures had been revised down to 917k (from 1,021k). The mortgage applications index – typically a leading indicator for the housing market – has also slowed. Luckily enough for home-builders (and owners) inventories are still relatively tight, which continues to support prices for the moment. Consumer confidence remains sluggish in May at 117.2 from a downwardly revised 117.5 a month ago, below consensus of 188.8, as plans for buying new homes and cars dropped sharply.

  • 31st May: Chinese Manufacturing PMI numbers for May are expected to display a mild slowing of the pace of the recovery, continuing a trend seen in recent months.
  • 4th June: After this month’s disappointing jobs report, the Biden administration will be hoping for signs of improvement in non-farm payrolls in May’s figures.

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