Global REITs Fall 3.1% In March On Recession, Commerical Real Estate Jitters
By Patrick Ma, Director, Listed Products and Research, Admiral Investments
April 4, 2023 – Global REITs declined 3.1% in March, underperforming global equities on recession fears and uncertainty about the state of the commercial property market post-US bank closures.
Meanwhile, expectations of an earlier end to the rising interest rate cycle due to concerns about the banking industry’s health caused global equities to rise 3.2% during the month.
Asia Pacific REITs similarly underperformed Asia Pacific equities. Australian REITs were the worst performers among Asia Pacific REITs, down 6.9%, as the RBA continued to raise the benchmark policy rate in March.
Japan and Singapore REITs fared better due to the weakening USD against JPY and SGD.
Overall, March’s performance for REITs and equities was a story of two halves. At the beginning of March, the market was focused on inflationary pressure and expectations of further rate hikes.
By late March, the focus had moved to news about the collapse of the U.S. Silicon Valley Bank, First Republic Bank, and Switzerland’s Credit Suisse. To prevent market failure, Credit Suisse was subsequently forced to merge with UBS. The merger also forced write-offs of Credit Suisse’s Additional Tier One Capital bonds (AT1 bonds or CoCo bonds), further increasing the capital markets’ volatility and uncertainty.
With US Fed’s and other central banks’ orchestrations, concerns about the further weakness of the banking system receded. By then, investors had changed their interest rate expectations from projections of more interest rate increases to near peaking of interest rates. Even with the U.S. Fed’s 25 bps rate hike to 4.75%-5.00%, the market is still expecting an early easing of the current tightening stance.
Towards the end of the month, a decision by OPEC and Russia to cut oil production surprised the market and spurred inflationary expectations. At the same time, U.S. and China PMI numbers suggested that the global economy still faced recessionary pressure. Such divergent trends clouded interest rate expectations and contributed to market volatility.
Given the current market circumstance, we may see another round of rate hikes by central banks. Still, policy interest rates are likely to peak soon as concerns about the economic outlook become more dominant. Whilst recessionary concerns may dampen the outlook for global REITs, Asia Pacific REITs may be better placed in relative performance given the region’s more benign economic outlook. Australian REITs could benefit from higher prices of oil and other commodities.