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US real estate: a strong foundation

Nicolas Lyle, senior analyst, STANLIB Global Property Fund

The US REIT industry, represented by NAREIT, is a beacon for other countries looking to benefit from an investment regime that provides investors with attractive long-term sustainable returns coupled with diversification benefits.

The table below shows the extent of the industry’s growth over the last 47 years. Today, 170 listed equity REITs have a combined market capitalization of just under $1.2 trillion (FNER Index) and operate in over 15 property ‘sub-sectors’ (niche markets). Institutional ownership (and free float) is generally higher than in other jurisdictions, setting the standard for good governance in an industry previously dominated by tycoons.

As a result, the US REIT market is the most liquid and diversified (in terms of property subsectors) real estate market in the world. It is also the largest, reflecting the size of the US economy and the sophistication of its investment markets. An estimated 80 million Americans own REIT shares through retirement and investment funds, such as Simon Property Group (SPG), the world’s largest owner of shopping centres, Prologis (PLD), the largest owner of industrial and logistics facilities and Public Storage (PSA) the largest owner of self-storage units. These three and many other large US REITs have grown to also acquire and develop portfolios internationally.

Growth in US REITs since 1972

[1]

 US REIT Performance 

[2]

[3]

 Source: NAREIT, SAREIT, Bloomberg. (Asia comprises Japan, Hong Kong, Singapore and Australia)

This consistent outperformance is largely a reflection of the structure of the US REIT market. Three key factors drive high performance:

 

  1. Specialisation (sub-sector focus)

[4]

Source: NAREIT, July 2019

 

The US REIT universe is significantly more diverse than other regions, with US REITs invested across 15 property subsectors (niches), including retail (Simon Property and Realty Income), residential (Equity Residential, Avalon Bay Communities), office (Boston Properties and Alexandria Real Estate) and industrial (Prologis and Duke Realty) to more alternative subsectors that have grown faster over the last two decades to become some of the largest REITs by market capitalisation.

 

Examples include: self-storage (Public Storage), healthcare (Welltower and Ventas), infrastructure (American Towers and SBA Communications) and data centres (Equinix and Digital Realty). These latter categories are well positioned to benefit from the needs of an ageing population as well as explosive growth in digital communications (5G and IoT) and data storage for cloud services.

 

  1. Relevance and liquidity

 

After five decades of growth, US REITs are larger in absolute terms and as a proportion of total US equity market capitalisation, on average, than REITs in other developed markets (only Australia is higher as a proportion). For example, there are 25 US REITs with a market capitalization of over $10 billion whereas in the next largest REIT markets there are far fewer (two in Japan and two in each of Germany and France).

 

US REITs’ higher level of liquidity and institutional ownership relative to other countries has generally encouraged higher quality management teams who are more accountable to institutional shareholders.

 

 

  1. Higher ROEs than peers

 

Over most time frames, US REITs have delivered higher return on equity (ROE) than other developed market REITs, and are forecast to continue doing so. This is the result of many factors, among others:

 

 

Conclusion

 

A diversified portfolio designed to deliver sustainable income growth for its investors would benefit from a long-term allocation of 10-20% to global REITs.

 

We believe that global REITs are a more attractive proposition for the long term than SA REITs and for now, we continue to prefer US REITs over those of other developed markets.