Global REITs : Standing up in uncertainty

For any investor or adviser that has lived through the past few weeks, the phrase 'geopolitical uncertainty' doesn't do the experience justice. The uncertainty caused by the anticipated impacts of a tariff war is already biting hard.

Compared to March, the University of Michigan’s Consumer Sentiment Index  reported an 11% drop in April. It is now at its lowest point since June 2022 during the pandemic.

For the second time in a week, on 7 April Goldman Sachs increased the probability of a U.S. recession, this time to 45% . JPMorgan Chase CEO Jamie Dimon expects it to be even worse, warning a recession is now a 60%  chance and a “likely outcome”.

Concerned by higher inflation risks and slower economic activity, at its meeting on 18 March the Federal Reserve lowered its 2025 GDP growth forecast from 2.1% to 1.7%. 
This was before global markets crashed, the bond market rebelled and the Trump administration blinked. We’ll have to wait until the next meeting in early May for recent events to be incorporated into the Fed’s forecasts.

What we can say is that the chaotic approach of the U.S. administration in policy and implementation is making business decisions more difficult and impeding international trade. It might be painful but it is also a source of opportunity. 

There is one asset class where some certainty still exists. In a world of declining consumer confidence, falling growth forecasts and the prospect of rising inflation, commercial real estate comes into its own.

We think that this is the time for the Dexus Global REIT Fund (GREIT Fund) to shine. That it also offers international diversification is a timely bonus.

The Dexus Global REIT Fund is built on three pillars - sourcing defensive qualities through reliable income; an active relative-value approach to boost returns; and a relentless search for growth at a reasonable price.

Two future articles will outline our attitude to growth, including an exploration of one sector that appears defensive but is very much about growth. Here we’ll examine the first two pillars—the fund’s defensive aspects, the income it generates and our relative-value, active approach.

We set out why we think that the Fund’s positioning suits the moment. While the overall investing environment is less certain than at any time since the pandemic, the fundamentals of commercial real estate are improving.

Global uncertainty is causing coordinated downgrades to GDP growth, increasing the possibility of further rates cuts. REITs are uniquely positioned to benefit.
With sector valuations attractive, we expect to see these factors play a more significant role in the months and years ahead.

Compared to a more volatile equity market facing higher inflation and falling consumer sentiment, REITs, backed by hard assets, are viewed as defensive investments. Currently, most feature stable dividend yields of around 4% and modest growth in line with or greater than inflation.

The year-to-date performance of the U.S REIT sector when compared to the S&P 500 and Nasdaq 100 indices makes this point well:

Despite the turmoil in equity markets—or maybe because of it—the attractions of the REIT sector have not gone unnoticed.

Select global REITs feature healthy customer demand, limited new supply, rental growth at or above inflation and stable capital markets. 

Past performance is not a reliable indicator of future performance. 

Despite resilient fundamental operating results, recent market movements reiterate the attractive relative return potential of the sector. Such are the benefits of hard assets, a haven in tumultuous times. 

Select REITs also remain attractively priced. Across our coverage universe, our model estimates currently indicate a discount to fair value of about 12%. 
As for the active, relative value approach we bring to global REIT investing, it is best illustrated by two recent examples. Both delivered significant total returns for investors in the Dexus Global REIT Fund. 

Retail Opportunity Investments Corp (ROIC) comprised a portfolio of 93 grocery-anchored shopping centres in high demand U.S. west coast markets. Limited new construction and strong robust consumer demand is driving rent escalations above the US REIT average.

But ROIC’s high implied capitalisation rate and the impending retirement of its CEO made it a prime takeover target. In November last year, Blackstone agreed to acquire ROIC in an all-cash deal, paying $17.50 per share—a 34% premium to ROIC’s July 29, 2024, closing price.

As managers of the Dexus Global REIT, we had planned for this outcome, holding a 3% portfolio weight versus a benchmark of 0.14%, contributing to an exceptional performance outcome for the Fund.

A similar situation ensued across the Atlantic where London-listed Urban Logistics REIT owns a U.K. portfolio of 130 small to mid-sized logistics assets. 

These feature long leases, blue-chip tenants, strong rental growth and falling vacancy rates. The REIT itself also offered a compelling valuation, trading at an implied cap rate of around 7.5%, a significant discount to its peers.

Earlier this year, activist investor Achilles Investment Company pushed for a strategic review to unlock shareholder value. This helped trigger the interest of LondonMetric, which subsequently acquired the company.

Again, we anticipated this outcome. Our 3.75% portfolio weighting, compared to a benchmark weighting of less than 0.1%, again contributing to a positive performance outcome for investors in the Fund.

This is an example of what delivering active, relative value looks like. The same approach was on display in our purchasing of North American preferred securities. It is positive proof of a consistent ability to buy well and opportunistically, securing excess returns. In part 2, we’ll look at how we access growth from more long-term opportunities.

¹_{https://www.sca.isr.umich.edu/}
²_{https://www.reuters.com/markets/us/goldman-sachs-raises-odds-us-recession-45-2025-04-07/}
³_{https://www.reuters.com/markets/jpmorgan-lifts-global-recession-odds-60-us-tariffs-stoke-fears-2025-04-04/}