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2022 Outlook: How The War And Inflation Will Affect REITs

Safe-haven markets such as Singapore and Australia could see capital inflows.

By Patrick Ma, Director, Listed Products and Research, Admiral Investment Limited

April 5, 2022 – REITs fell in January on concerns over inflation but recovered lost ground with positive gains in March as Russia’s invasion of Ukraine sparked a search for defensive assets.

Inflationary pressure had already been building on the back of post-pandemic recovery, tight labour market, and expectations of further growth from the reopening of economies by most developed countries. Rising prices were reflected in the US headline inflation rate of 7.9% in February 2022, the highest in 40 years.

A major consequence of Russia’s invasion of Ukraine had been the jump in energy and commodity prices. The war and the sanctions led to the disruption of supplies of oil, gas and agricultural products, of which Russia and Ukraine are major suppliers. 

While prices for energy and commodities seem to have stabilised after the initial spikes,  supply disruptions and heightened perceptions of scarcity will likely cause further inflationary pressure.

This build-up in inflationary pressure prompted the US Fed to raise the benchmark policy rate by 25 basis points (bps) in March, the first-rate hike since 2018. Currently, investors are expecting the Fed to raise rates by 125 bps over the year, with another 50 bps in May.

As of December 29, 2021; January 31, 2022; February 28, 2022; March 31, 2022
Indices referenced.

Inflation concerns aside, Russia’s prolonged war in Ukraine has raised geopolitical risks. The war has reinforced ties among Western countries — both on security and ideological grounds — on the back of perceived threats from Russian aggression. Regardless of the outcome of the Russia-Ukraine war, it is likely that:

1. Defence spending as a proportion of Gross Domestic Product will rise

2. Deglobalisation trends will accelerate with an increasing emphasis on security and certainty of supply chains and manufacturing bases over efficiency

3. Different and competitive regional blocs will emerge 

4. The search for safe havens will heighten, which benefits REITs

REITs Outlook Still Positive 

Despite concerns about higher interest rates and inflationary pressures and their impact on REITs’ performance, we maintain our positive view of global REITs. 

The Russia-Ukraine war has affected supply and demand fundamentals, but the global economy remains on its post-pandemic recovery track, which benefits the real estate sector. The outlook for rental growth is positive, and the path of returning to pre-pandemic levels is evident.

Sectoral And Market Views

We believe the following trends to be more pronounced within the real estate sector:

1) Rising office rents: We believe that office rent in most markets will see a post-pandemic rebound as workers return to offices. We expect most corporations to adopt a hybrid work model, combining working from home and office. We should see the return of some corporate employees to central business district (CBD) offices. Non-CBD offices, adapted for hybrid work will be in demand due to lower occupancy costs and transportation costs for employees.

2) Demand for logistics properties: We expect demand for logistics properties to stay strong amid ongoing de-globalisation trends and the emphasis on supply chain security. Domestically, countries are likely to develop logistics that adapt to demand to re-localise operations and networks. The demand for logistic properties has already been rising due to e-commerce during Covid, and this trend will continue.

3) The search for safe-haven markets: Heightened concerns about rising geopolitical risks and the unexpected sanctions from sovereign states have led to a search for safe assets. We believe REITs from markets with safe-haven statuses, such as Australia and Singapore, are likely to benefit from such trends. Continuing capital inflows will help boost real estate valuations in these markets.