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In a 2023 Global Real Estate Outlook, Hazelview’s Corrado Russo argues that the performance of top companies with solid balance sheets and cutting-edge real estate portfolios performed unusually poorly, even though property categories such as self-storage, single-family rentals and apartments are structured to benefit from rising inflation.

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“This year (2022) is on pace to be the second worst performance year ever, since the start of the global REIT era over 30 years ago,” the report said. “Only the global financial crisis in 2008 was worse, and only four times (1990, 1992, 1994 and 2008) have global REITs declined by more than 10 per cent.”

The report calculates that REIT valuations are now discounted by 26 per cent and remain 14 per cent below their pre-COVID trading levels. By comparison, other global entities are trading nine per cent above February 2020 levels.

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“Fundamentals went out the door in 2022 as markets focused on high-inflation and hawkish monetary policy,” Russo, Hazelview’s senior managing director said in the report.

“And, while this can be frustrating for us as active managers, we know this can present exceptional opportunities in 2023 which we believe will be more about weaker growth, moderating inflation, and an end to rate hikes or a partial reversal.”

In December, the Bank of Canada further increased its interest rates by 50 bps to a rate of 4.25 per cent — marking the seventh increase since April, in what has been one of the most aggressive tightening cycles in history.

Hazelview portfolio manager Samuel Sahn said it was “the anticipation of rate hikes that hurts REITs most.”

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“With uncertainty around the cost of borrowing, it is very difficult for markets to assess the value of the underlying real estate owned by REITs,” he said in the report. “Rates hikes don’t necessarily even need to reverse to shift the valuation paradigm, they just need to moderate or stop going up and be more predictable.”

Although stabilized rates benefit real estate purchasers of all types, Bank of Montreal economist Robert Kavcic believes an increase of 25 bps is still to come in 2023.

“Our view is that we’ll see a final 25 bp move early next year, and then the attention will turn to the more important question investors should have on their minds: How long will rates stay at these restrictive levels? We continue to see rate cuts as a 2024 story,” Kavcic said in a note to clients.

In the meantime, the forecast suggests that transparency around interest rates is expected to positively change the REIT landscape in 2023.

“Clarity around interest rates … should drive share price performance and the best-in-class portfolios that have been unjustly punished should start to separate themselves from the pack once again,” the report said.

Hazelview owns and manages $11.6 billion in assets and employs a team of global investment and asset managers in their Toronto, New York, Hamburg and Hong Kong offices.

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