A history of strong REIT returns
The recovery in property fundamentals as economies have reopened has led to substantial returns for listed real estate over the past year, largely offsetting the pandemic-induced selloff in early 2020. Over the longer term as well, REITs in the UK and Europe have, on average, outperformed most open-ended UK direct property funds (Exhibit 1).
For the past decade, European REITs have delivered three times the real return of the median UK direct property fund. As for consistency, European REITs have outperformed the median UK direct property fund in 90% of rolling three-year periods and in 97% of rolling five-year periods.
The compound effect of this outperformance has been substantial: A £10,000 investment made 10 years ago in the median UK brick-and-mortar open-ended fund would have grown to about £12,000 in inflation-adjusted value, compared with about £17,000 for European REITs. For income-focused investors, listed real estate has historically delivered comparable yields to direct property investment, with a 10-year average yield of 4.0% and a current 12-month yield of 3.0%, equal to the current-year average yield of the top five UK direct property funds.
Following the collapse of the open-ended direct property fund sector in 2008, it seemed inconceivable that these funds would return to prominence. History repeated itself in the liquidity crunch that followed the Brexit referendum. Will this time be any different? Will UK investors finally follow the path of other developed investment markets, which have embraced real estate securities as an effective vehicle for allocating to real estate?
The facts in our view are clear:
- European REITs have a stronger performance track record, outperforming the median UK direct property fund by 370 basis points annually over the past decade (Exhibit 1). Active managers can further enhance this return advantage: Since May 2013, when the current portfolio manager of the Cohen & Steers SICAV European Real Estate Securities Fund took over, the fund has outperformed its benchmark by more than 500 basis points per year.
- REIT funds tend to be more diversified than the typical UK direct property fund, with access to more markets and alternative property types such as self-storage, health care and student housing.
- REITs are liquid, with a history of remaining fully open for trading, even during economic crises.
There is no need to wait for regulators to “fix” the structure of daily dealing open-ended direct property vehicles. An alternative within the real estate sector exists, represented by a £1.4 trillion global real estate securities market. What happens next is up to investors.
