Despite significant global economic challenges, real estate investment trusts (REITs) have proven resilient, with many adjusting their strategies to navigate turbulent market conditions, according to KPMG’s latest analysis.
In a recent post on its website, KPMG highlighted how high inflation and rising interest rates have dampened REITs’ distribution yields in recent quarters. The impact has been most pronounced in the Singapore and Canada markets, where KPMG’s Financial Performance Index (FPI) scores have dipped below 80 out of 100, signaling weaker performance compared to the broader sector average.
The report sheds light on the broader challenges facing REITs globally, including the effects of market volatility and rising costs. However, KPMG also points to the measures that REITs have implemented to adapt, including a focus on lowering leverage and laddering debt maturities to improve balance sheet strength.
Key Findings from KPMG’s Report:
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Regional Performance Differences: Data centers have emerged as the strongest-performing segment in both North America and Asia, boasting impressive returns of 19.4% in the first half of 2023. On the flip side, office, retail, and industrial REITs have underperformed. These sectors continue to struggle with weak recovery in demand, which has failed to keep pace with supply in the post-pandemic era. Additionally, rising costs are contributing to challenges in these segments.
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Resilient REITs Amid Market Volatility: Despite facing uncertain capital markets and a turbulent mortgage landscape, REITs have shown remarkable resilience. They have maintained strong operational fundamentals, robust balance sheets, and have successfully issued equity and unsecured debt. According to KPMG, the leverage levels of global REITs are currently lower than during the 2008/09 financial crisis, with valuations remaining volatile but yields generally attractive.
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Strategic Adjustments Post-Pandemic: The COVID-19 pandemic prompted a reassessment of REIT business strategies. Pre-pandemic, regulatory efforts had already driven a reduction in leverage, helping strengthen balance sheets. As a result, REITs have reduced their debt, adopted a more cautious approach to development, and prioritized high-credit-quality assets in their portfolios.
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Lower Leverage and Laddered Debt Maturities: Over the past decade, REITs have made significant strides in lowering leverage. Their average loan-to-value ratio has decreased from a peak of 38% during the 2008 financial crisis to approximately 33% today. This reduction in leverage has been a key strategy in enhancing creditworthiness and ensuring greater stability in a fluctuating market.
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The Impact of Macroeconomic Headwinds: While many REITs have seen above-par FPI scores in the past six quarters, Singapore and Canada have experienced notable declines. The broader global trend of rising interest rates and inflation has narrowed the yield gap between riskier REITs and safer investments like government bonds, adding pressure to REIT performance.
Despite these hurdles, KPMG concludes that REITs’ robust financial strategies, including lowering leverage and strategically managing debt maturities, have enabled them to weather significant market disruptions. With rising inflation and interest rates continuing to pose challenges, their ability to remain resilient and adapt to shifting market conditions will be key to their long-term success.
As the market continues to evolve, it’s clear that REITs will remain an essential component of the global investment landscape, particularly for those seeking relatively stable returns amidst economic uncertainty.
