With continued uncertainty in the markets, could now be the time to consider property shares for client portfolios, as a layer of security? Darius McDermott, managing director of FundCalibre and Chelsea Financial Services considers what REITs may offer portfolios.
While most parts of the market have experienced an upswing in fortunes since Covid hit at the start of 2020, property shares have lagged, having run into one problem after another.
While inflation is a friend (Reits can pass on price increases), interest rate rises are most definitely a headwind for a geared asset class. The numbers speak for themselves – in the past three years global equities have returned over 30%, meanwhile the FTSE EPRA Nareit Developed Index (which tracks the performance of listed Reits worldwide) has fallen almost 10%*.
The start of this year was expected to be something of a catalyst for change, with rates peaking and many Reits trading at historic discounts relative to equities. Then US President Donald Trump announced his extraordinary tariff regime in early April, plunging the world economy into panic mode – with recession very much on the radar.
Safe havens are now the order of the day, with gold and European bonds among some of the popular choices. But could property shares actually offer investors an alternative layer of security as we prepare for greater volatility ahead?
Although far from immune, while many companies have major clouds over their earnings in these challenging environments, commercial real estate operates off legally contractual leases where future cash flows are more transparent. High-quality real estate typically attracts high-quality tenants, who tend to meet their obligations – in other words you are more likely to get your income returns.
A degree of protection
Janus Henderson co-head of global property equities, Guy Banyard, says although tariffs might weigh on the economy, the number one enemy of a high-quality, commercial real estate landlord is new supply that tries to poach tenants**.
He says: “If building materials like steel and lumber become more expensive, and if deportations shrink the construction labour force, making labour more expensive, the cost to build will go up. This creates an additional hurdle for developers, which is good news for incumbent landlords.
“The supply backdrop was already looking supportive with the brakes having been hit on new construction in many sectors in 2022/23. This benefit should feed into landlords’ pricing power in the years ahead, notably in sectors such as industrial/logistics and apartments.”
TR Property manager Marcus Phayre-Mudge says even if we do see a shallow recession, real estate assets tend to do well in that scenario on both a relative and absolute basis. The reason for this is the price of money typically comes down because central banks see economies slowing down and inflation coming under control – real estate benefits from that as a leveraged asset. In addition to this, in shallow recessions you do not get huge job losses and companies quickly trying to reduce the three factors of production (land, labour and capital). Essentially, companies don’t reduce the facilities they operate from; retailers don’t scale back the number of shops they sell from; and offices don’t reduce headcount.
He says: “For real estate, these businesses have leases and obligations. We are a debtor on the balance sheet of these businesses – so rents are still going to be paid. The school of thought is that real estate will be alright as long as you are best in class and as long as your balance sheets are able to withstand a likely widening in spreads.”
Access to a number of secular trends
A recent market update from the Cohen & Steers Global Real Estate Securities fund pointed to tariffs being unlikely to slow down the strong secular demand for a number of property sectors. For example, data centres, due to the rise in cloud computing and 5G; housing for the elderly; and GP surgeries
But the market is far from immune, with areas where discretionary spend is more prominent likely to suffer (hotels, leisure, restaurants and other specific retail areas), as a recession is most likely to hit these jobs first.
Phayre-Mudge says there is no reason for the valuation of a company to be hurt when it is based on its future income stream. If that income stream is not at risk, for example the likes of Tesco and Sainsburys are still going to pay the rent, then it makes no sense. These are companies where there is no debt refinancing for a couple of years, the LTV is around 30-35% and people will always need them.
We have lived in a world where defensive growth stories have been largely overlooked by strong growth plays for a number of years now. But volatility looks like it is here to stay and many of those growth stories (principally large tech) still look expensive. By contrast, Reits provide generally stable and recurring income and that will always have a place in a portfolio at any time – you are getting reasonably high single-digit levels of income by investing in companies on an attractive discount, which is not always warranted.
Investors wanting pure exposure may want to consider the likes of TR Property or the CT European Real Estate Securities fund, both managed by Phayre-Mudge, or the Cohen & Steers Global Real Estate and European Real Estate strategies. Meanwhile, multi-asset managers like VT Momentum Diversified Income fund has almost 9% in Reits across numerous specialist trusts, while the Aegon Diversified Income fund has almost 6% in listed property exposure***.
*Source: FE Analytics, total returns in pounds sterling for the MSCI World and the FTSE EPRA Nareit Developed Index, figures from 8 May 2022 to 8 May 2025
**Source: Janus Henderson, 19 March 2025
***Source: fund factsheet, 31 March 2025
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
