M
arket turbulence has tested the mettle of real estate investment trusts (REITs), but many have adapted by fine-tuning their strategies to navigate choppy waters. According to KPMG's latest analysis, REITs are demonstrating remarkable resilience in the face of global economic headwinds.
High inflation and rising interest rates have taken a toll on REIT distribution yields, with Singapore and Canada markets feeling the pinch most acutely. The Financial Performance Index (FPI) scores for these regions have dipped below 80 out of 100, indicating weaker performance compared to the broader sector average.
Despite these challenges, KPMG highlights the proactive measures REITs have taken to bolster their balance sheets. By focusing on reducing leverage and strategically managing debt maturities, REITs are better equipped to weather market volatility.
Key takeaways from KPMG's report include:
* Data centers have emerged as a standout performer in both North America and Asia, boasting impressive returns of 19.4% in the first half of 2023.
* Office, retail, and industrial REITs continue to struggle with weak demand recovery and rising costs.
REITs' ability to adapt has been remarkable, with many maintaining strong operational fundamentals and robust balance sheets despite uncertain capital markets and a turbulent mortgage landscape. Leverage levels are currently lower than during the 2008/09 financial crisis, and valuations remain volatile but yields generally attractive.
The COVID-19 pandemic prompted a strategic reassessment of REIT business models, driving a reduction in leverage and a focus on high-quality assets. This shift has enabled REITs to reduce debt, adopt a more cautious approach to development, and prioritize creditworthiness.
By lowering leverage and laddering debt maturities, REITs have enhanced their creditworthiness and ensured greater stability in a fluctuating market. The average loan-to-value ratio has decreased from 38% during the 2008 financial crisis to approximately 33% today.
While rising interest rates and inflation continue to pose challenges, KPMG concludes that REITs' robust financial strategies have enabled them to weather significant market disruptions. As the market evolves, REITs will remain an essential component of the global investment landscape, offering relatively stable returns amidst economic uncertainty.
