Property Equities: “What’s going on? Anyone? Anyone?”
The Global Property Equities Team highlights the importance of diversification and predictability, two key factors that investors should focus on amid the current market turmoil.
6 minute read
Key takeaways:
- Like wider equity markets, property equities have recently seen European and Asian outperformance and US underperformance. Defensives such as healthcare and net lease have outperformed more economically-sensitive sectors such as hotels, retail and office.
- Gauging tariff and supply chain impacts is tricky. Companies with higher earnings visibility within domestic markets makes earnings easier to predict – real estate is a local business.
- In an uncertain environment, investors should focus on diversification and sectors with more predictable cash flows, in addition to management skill and balance sheet acumen. The valuation backstop from real assets comprising the left side of balance sheets helps as well.
There haven’t been many moments of levity this year for investors, but one was forthcoming recently. When asked to explain the impact of tariffs, economists reached for the Smoot-Hawley Tariff Act playbook. Film aficionados may recall a scene from ‘Ferris Bueller’s Day Off,’ which not only mentions these 1930 tariffs, but also partly sums up how both Main Street and Wall Street alike are feeling at the moment: dazed and confused. But unlike the scene in the movie where a teacher is trying to explain the tariffs to high school students – investors are certainly not bored.
What is going on in property equities markets?
Safe havens have been the order of the day. Since President Trump’s ‘Liberation Day,’ gold and European government bonds in particular have done well in local currency terms and even better in US dollars. On the flip side, the Magnificent 7 and oil are down about 10%.1 This probably makes sense given the existing very high valuation starting point for the Mag 7 and concerns about global economic growth dragging down the price of oil.
Over in real estate, things (thankfully) have been a little quieter, and as we’ve written about recently, this is certainly what we were hoping to see. In our world of real estate equities, we have seen similar trends to those in the wider equity markets, namely European and Asian outperformance and US underperformance. Within property types, landlords with longer lease durations and more non-discretionary assets such as healthcare and net lease have outperformed more economically-sensitive sectors such as hotels, retail and office.
What questions should real estate investors be asking?
The answer to this question is probably to be found away from the world of real estate and is highly dependant on policy (and tweets) from the Oval Office. As such, making predictions is fraught with difficulty and may not be very reliable. Another reasonable question to ask is, ‘What patterns are we seeing, and will they continue?’ It seems there will be little let up in terms of news flow, both good and bad. Therefore, investors should continue to expect a much wider range of outcomes and to ascribe a much higher probability to these outcomes, both positive and negative.
A final issue to consider is: ‘Are economic norms at risk, and if so which ones?’ It is perhaps too early to answer this question, but markets are already having a stab at it, mostly centering around the role of US assets as a safe haven and more recently, the independence of the US Federal Reserve. If these norms are disrupted, there will be far-reaching investment implications for all investors. If they remain, there may prove to be profitable opportunities in high quality US-listed companies, including within real estate, which have been heavily sold of late.
Can property equities provide any answers?
To answer this, we probably need to ask one final question: ‘What investment characteristics should we be looking for in this (likely to be prolonged) volatile environment?’ We think companies with greater earnings visibility, and durable long-term asset bases like real estate are more likely to do better than those that were predicting quarterly sales based on input costs and consumer demand, which are now nearly impossible to predict. That real estate entered the most recent period of turmoil at historical discounts to broader equities also provides some comfort. Analysing tariffs, fiscal and monetary policy, and currencies is as difficult as it has ever been. Therefore, domestic earnings versus global earnings is a key consideration – in this regard, real estate is about as local a business as you can find.
But we will not be immune. If the global economy slows this may impact consumer and business confidence resulting in slower rental growth. However, contractually escalating leases can help offset this, as will the likelihood of lower interest rates in this uncertain environment. No doubt, as we’ve seen, property types with more cyclical and short duration leases will be more negatively impacted, whilst more defensive areas should do better. Management skill and balance sheet acumen will also likely come to the fore. If business and consumer sentiment improve, active managers within listed real estate can reposition portfolios towards property types that are more likely to benefit from a return towards ‘normal’.
Right now, there are a lot more questions than answers. This is frustrating for investors who have historically been used to a higher degree of certainty, and possibly become complacent about central banks or governments providing a backstop for increasingly rich equity valuations (to the detriment of real estate investment trusts’ (REITs’) relative valuation over recent years). Our view is that real estate equities can provide answers and solutions to some of these questions, and with the prevailing conditions looking likely to continue for longer, maybe it isn’t just Ferris Buller who could do with a day off!
Diversification and predictability will be key
There is always opportunity in times of turmoil. US Federal Reserve Chair Jerome Powell recently invoked ‘the great Chicagoan Ferris Bueller’ in a policy speech: “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” We believe the historically attractive relative valuation of listed real estate now, combined with a macro environment that is increasingly unpredictable makes the present an opportune time for investors to consider real estate equities. Diversification and predictability have been undervalued by the market but will likely remain key – we believe an allocation to real estate equities can provide investors with both these important portfolio characteristics.
1 Source: Bloomberg, Janus Henderson Investors, returns period 2 April to 22 April 2025. Past performance does not predict future returns.
IMPORTANT INFORMATION
REITs or Real Estate Investment Trusts invest in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares.
Real estate securities, including Real Estate Investment Trusts (REITs), are sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, supply and demand, and the management skill and creditworthiness of the company. Additionally, REITs could fail to qualify for certain tax-benefits or registration exemptions which could produce adverse economic consequences.
Balance sheet: a financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders and is an indicator of a company’s financial health, or strength.
Cyclical: cyclical stocks or businesses are closely tied to the economic cycle and tend to rise and fall in tandem with the overall economic cycle. Cyclical stocks react differently in each of the phases of economic expansion, peak, recession, and trough.
Fiscal and monetary policy: fiscal policy is the use of government spending and taxation to influence the economy, whereas monetary policy sees central banks setting interest rates and controlling the supply of money to influence the level of inflation and growth in an economy.
Magnificent 7: the Mag 7 refers to the seven major technology stocks – Apple, Microsoft, NVIDIA, Amazon, Tesla, Alphabet and Meta – that have dominated markets in recent years.
Safe-haven asset: an asset that is expected to retain its value or potentially even gain value, during periods of economic uncertainty or market turbulence, eg. gold, US government debt, the US dollar, cash, etc.
Smoot-Hawley Tariff Act: also referred to as the United States Tariff Act of 1930, the Act raised around 900 import tariffs by an average of 40% to 60%, aiming to safeguard US businesses and farmers. Instead it huge stress to the Great Depression as it raised food prices and other items. Other countries retaliated with tariff hikes, forcing global trade to decline by 65%, and highlighted how dangerous protectionist trade policies are for the world economy, which then led to the promotion of free trade agreements that support fair trade for all.
6 minute read
Key takeaways:
- Like wider equity markets, property equities have recently seen European and Asian outperformance and US underperformance. Defensives such as healthcare and net lease have outperformed more economically-sensitive sectors such as hotels, retail and office.
- Gauging tariff and supply chain impacts is tricky. Companies with higher earnings visibility within domestic markets makes earnings easier to predict – real estate is a local business.
- In an uncertain environment, investors should focus on diversification and sectors with more predictable cash flows, in addition to management skill and balance sheet acumen. The valuation backstop from real assets comprising the left side of balance sheets helps as well.
