An allocation to real estate is increasingly important for multi-asset portfolios to help manage the extra dose of market volatility following the US Federal Reserve’s hawkish messaging last week.
In particular, private real estate should appeal to investors looking for shelter, according to Nuveen.
“[The asset class] offers the potential for attractive yields while offering diversification and uncorrelated returns during times of market turmoil, such as we saw during the Covid-induced recession and equity bear market,” explained Saira Malik, the firm’s chief investment officer.
The ability of private real estate to help portfolios manage volatility benefits from the fact that its values are determined solely by observed, actual real estate transactions, she explained.
This not only makes it less volatile than public real estate, but also less correlated to public equities.
Key sectors emerging
Within real estate overall, whether public or private, Nuveen is backing the industrial sector in the US.
“The sector is still being buoyed by e-commerce tailwinds, which should support urban logistics locations in growing metro areas of the south and west coast [of the US],” Malik added.
Further, supply chain diversification and nearshoring trends should boost demand for space at east coast ports and US/Mexico border markets.
In addition, in the public real estate investment trusts (REITs) space, the gaming sector offers above-average cash flows and dividend growth.
“Since 2019, this sector has generated high-single-digit rental and dividend growth, reflecting annual rent escalations on most leases,” said Malik, adding that consolidation within the gaming industry has also been a tailwind, with external growth driven by sale leaseback agreements with operators.
More broadly, REITs have historically lagged equity markets during central bank rate-hiking cycles. Plus, Nuveen has seen these instruments show relative outperformance as visibility to the end of the cycles has improved.
“Such periods typically coincide with a broader economic slowdown when REITs’ longer-duration cash flows find more favour in the market,” added Malik.
Housing market signals
Nuveen is also starting to see signs in the macro landscape that should benefit investors in commercial real estate.
For example, several housing-related data releases suggest a notable cooling-off of the US market, such as a fall in new home construction by over 11% in August, and a deceleration in apartment rent increases.
As a result of demand waning and real-time rent growth moderating, Malik expects further decreases in owners’ equivalent rents – a component of the Consumer Price Index that currently accounts for 65% of its year-on-year increase, and reported on an approximately 12-month lag.
“If these expectations come to pass, we may see a definitive end to the Fed’s current rate-hiking cycle, which could prove extremely beneficial for commercial real estate investments,” she added.