In March 2022, the Federal Reserve is expected to launch an increase of the Effective Federal Funds Rate (EFFR), its first since late 2018. Since that time, seven rate hikes have been implemented with the most recent effort putting the federal funds target rate between 5.00% and 5.25%.
There has been some discussion about a potential pause in rate-hikes; however, recent articles are casting doubt on this due to continued strong economic data. Whenever there is an end to tightening cycles, CenterSquare anticipates it will be beneficial for public REITs relative to private real estate and public equities.
CenterSquare conducted analysis of past four rate-hike cycles within three decades for their insights brief “Once The Fed Is Done Tightening: How Will Real Estate Perform?” Data shows that public REITS outperformed private real estate and public equities in 90-day, 180 day and one year periods following completion of Fed increases rates . This occurs because when rates rise markets tend discount assets such as real estate by building a risk premium into pricing resulting in discounts followed by upside opportunities when conditions change . The steeper net asset value discount at end of hike cycle results wider outperformance against private market over one year period according Centre Square’s research findings .
The current discounted valuations across U S REIT market combined with changing monetary regime offer attractive entry point today , setting up potential meaningful outperformance upon regime change according Centre Square’s reportage.. When comparing performance against equity markets , cheaper trading multiple versus equity can result moderate outperformance compared S&P 500 after current hike cycle ends .. Historical results may not necessarily tie future performance but favorable fundamentals coupled balance sheet strength & discounted valuations make listed real estate attractive opportunity investors concluded Centre Square’s report
