Rates, Macro Conditions, & Seasonality Bode Well for US REITs
Rates & REITs move inversely. Higher rates dampen REITs performance. Declining rates favour REITs returns. With rates easing, are REITs at the cusp of recovery?
What does 2025 hold for US real estate? The answer is best captured in two words - "Cautiously Optimistic".
2025 Commercial Real Estate ("CRE") Outlook - a survey by Deloitte - shows that ~90% of global respondents expect their firm's revenues to increase.
The CRE industry has been facing headwinds in recent years. Elevated interest rates and high inflation hurt real estate. Inflation thus far is softening and with it rates are easing too.
Tailwinds powering optimism for the real estate sector are (a) expectations that 2025 will be a year of potential recovery, (b) higher operating efficiency fuelled by greater tech spending to enhance core operations & processes, and (c) easing financial conditions.
The sector is not without its idiosyncratic headwinds. These include (a) the looming wall of loan maturities, and (b) President-elect Trump's potential tariff policy which could potentially push inflation up resulting in rates remaining far higher for longer.
The Deloitte Center for Financial Services concluded a survey of >880 C-level executives and their direct reports at top CRE owners and investment firms.
Participants were asked to opine on their firm's growth prospects, investment priorities, and operations over the next 12 to 18 months. Respondents were real estate firms from North America, Europe & Asia Pacific with AUM of >USD 75 million.
In response to questions on revenue forecast, 88% of the respondents expect their revenues to rise. Three-fifths of them expect revenues to grow by more than 5% YoY.
This survey was conducted between June and July 2024.
Source: Deloitte
Optimism by the respondents remains guarded given elevated interest rates, changes in tax policies, and high cost of capital. Even as rates have come off from peaks, they are expected to remain higher for longer in contrast to record-low rates witnessed over the last decade.
Adding to the above source of concerns is the impending wall of loan maturities. USD 600 billion in loans in the US will be maturing in 2024. Another USD 214 billion from 2023 loan extensions and about USD 500 billion is set to mature in 2025.
In totality, notwithstanding the challenges ahead, the outlook for US real estate in 2025 is positive for growth and investment.
DOW JONES US REAL ESTATE INDEX (“RX”) REPRESENTS US REITS
Beyond REITS, RX represents other firms that invest in real estate through development, management, or ownership, including property agencies.
RX is a float-adjusted market capitalization index. Its pricing is transparent and based on securities traded in the stock market.
The prices of the component stocks in the RX index, primarily comprising REITs, are influenced by factors such as lease rate fluctuations, vacancy levels, property development, and real estate transactions.
The index is calculated on a real-time basis. It is rebalanced annually in September with share changes. IPO updates are considered in March, June, and December.
The total returns (price appreciation plus dividends) of the index since 2014 is summarized below:
Source: DJ US Real Estate Index Factsheet
The RX comprises 64 stocks with the top ten constituents forming 49.1% of the index as of the end of October 2024. The top ten by index weight include:
Source: DJ US Real Estate Index Factsheet
These stocks are expected to provide a 6% average upside potential over the next 12-month period based on analyst forecasts. Across these, the maximum upside is 22% on average with a minimum upside average of -13%.
Twelve-month price forecasts among the top 10 are weighted towards the upside.
Source: TradingView
Top sector REITs within the index include Telecom Towers (12.6%), Retail (12%), Health Care (11.8%), Industrial (10.9%), and Data Centres (10.4). Detailed breakdown in the chart below:
Source: DJ US Real Estate Index Factsheet
CME GROUP’S DOW JONES U.S. REAL ESTATE INDEX FUTURES ENABLES BROAD ACCESS
CME Group’s DJ U.S. Real Estate Index Futures (“RX Futures”) enables broad access to US REITs and real estate participants. It allows users to fine-tune and/or hedge commercial real estate exposure in their portfolios.
The notional value of each contract is USD 100 times the index value. Four contract months ending each quarter (Mar, Jun, Sep, and Dec) are listed. All positions are cash-settled. Each tick size is 0.1 index point translating into a P&L of USD 10 per tick.
SEASONALITY FAVORS A LONG POSITION
CME’s DJ U.S. Real Estate Index Futures (“RX Futures”) exhibits buoyancy towards the end of the year based on observations over the last five years. Except for 2022, RX Futures have jumped 475 basis points (4.75%) from late November until the end of December.
Source: RRX1!/SEASONALS
Based on the last 11 years of observations, RX futures have delivered a positive return 73% of the time with an average upside of 1.1% (maximum upside of 9.25% and maximum downside of 8.33%).
HYPOTHETICAL TRADE SETUP
An optimistic outlook fuelled by favourable macroeconomic conditions & positive seasonality, a long position in RX futures creates a compelling hypothetical trade setup.
An entry at 382.5 coupled with a target at 414 and stop at 360 delivers a 1.4x reward-to-risk ratio.
• Entry: 382.5
• Target: 414
• Stop Loss: 360
• Profit at Target: USD 3,150 ((414 – 382.5) x USD 100 = 3,150)
• Loss at Stop: USD 2,250 ((360 – 382.5) x USD 100 = -2,250)
• Reward-to-Risk: 1.4x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
What does 2025 hold for US real estate? The answer is best captured in two words - "Cautiously Optimistic".
2025 Commercial Real Estate ("CRE") Outlook - a survey by Deloitte - shows that ~90% of global respondents expect their firm's revenues to increase.
The CRE industry has been facing headwinds in recent years. Elevated interest rates and high inflation hurt real estate. Inflation thus far is softening and with it rates are easing too.
Tailwinds powering optimism for the real estate sector are (a) expectations that 2025 will be a year of potential recovery, (b) higher operating efficiency fuelled by greater tech spending to enhance core operations & processes, and (c) easing financial conditions.
The sector is not without its idiosyncratic headwinds. These include (a) the looming wall of loan maturities, and (b) President-elect Trump's potential tariff policy which could potentially push inflation up resulting in rates remaining far higher for longer.
The Deloitte Center for Financial Services concluded a survey of >880 C-level executives and their direct reports at top CRE owners and investment firms.
Participants were asked to opine on their firm's growth prospects, investment priorities, and operations over the next 12 to 18 months. Respondents were real estate firms from North America, Europe & Asia Pacific with AUM of >USD 75 million.
In response to questions on revenue forecast, 88% of the respondents expect their revenues to rise. Three-fifths of them expect revenues to grow by more than 5% YoY.
This survey was conducted between June and July 2024.
Source: Deloitte
Optimism by the respondents remains guarded given elevated interest rates, changes in tax policies, and high cost of capital. Even as rates have come off from peaks, they are expected to remain higher for longer in contrast to record-low rates witnessed over the last decade.
Adding to the above source of concerns is the impending wall of loan maturities. USD 600 billion in loans in the US will be maturing in 2024. Another USD 214 billion from 2023 loan extensions and about USD 500 billion is set to mature in 2025.
In totality, notwithstanding the challenges ahead, the outlook for US real estate in 2025 is positive for growth and investment.
DOW JONES US REAL ESTATE INDEX (“RX”) REPRESENTS US REITS
Beyond REITS, RX represents other firms that invest in real estate through development, management, or ownership, including property agencies.
RX is a float-adjusted market capitalization index. Its pricing is transparent and based on securities traded in the stock market.
The prices of the component stocks in the RX index, primarily comprising REITs, are influenced by factors such as lease rate fluctuations, vacancy levels, property development, and real estate transactions.
The index is calculated on a real-time basis. It is rebalanced annually in September with share changes. IPO updates are considered in March, June, and December.
The total returns (price appreciation plus dividends) of the index since 2014 is summarized below:
Source: DJ US Real Estate Index Factsheet
The RX comprises 64 stocks with the top ten constituents forming 49.1% of the index as of the end of October 2024. The top ten by index weight include:
Source: DJ US Real Estate Index Factsheet
These stocks are expected to provide a 6% average upside potential over the next 12-month period based on analyst forecasts. Across these, the maximum upside is 22% on average with a minimum upside average of -13%.
Twelve-month price forecasts among the top 10 are weighted towards the upside.
Source: TradingView
Top sector REITs within the index include Telecom Towers (12.6%), Retail (12%), Health Care (11.8%), Industrial (10.9%), and Data Centres (10.4). Detailed breakdown in the chart below:
Source: DJ US Real Estate Index Factsheet
CME GROUP’S DOW JONES U.S. REAL ESTATE INDEX FUTURES ENABLES BROAD ACCESS
CME Group’s DJ U.S. Real Estate Index Futures (“RX Futures”) enables broad access to US REITs and real estate participants. It allows users to fine-tune and/or hedge commercial real estate exposure in their portfolios.
The notional value of each contract is USD 100 times the index value. Four contract months ending each quarter (Mar, Jun, Sep, and Dec) are listed. All positions are cash-settled. Each tick size is 0.1 index point translating into a P&L of USD 10 per tick.
SEASONALITY FAVORS A LONG POSITION
CME’s DJ U.S. Real Estate Index Futures (“RX Futures”) exhibits buoyancy towards the end of the year based on observations over the last five years. Except for 2022, RX Futures have jumped 475 basis points (4.75%) from late November until the end of December.
Source: RRX1!/SEASONALS
Based on the last 11 years of observations, RX futures have delivered a positive return 73% of the time with an average upside of 1.1% (maximum upside of 9.25% and maximum downside of 8.33%).
HYPOTHETICAL TRADE SETUP
An optimistic outlook fuelled by favourable macroeconomic conditions & positive seasonality, a long position in RX futures creates a compelling hypothetical trade setup.
An entry at 382.5 coupled with a target at 414 and stop at 360 delivers a 1.4x reward-to-risk ratio.
• Entry: 382.5
• Target: 414
• Stop Loss: 360
• Profit at Target: USD 3,150 ((414 – 382.5) x USD 100 = 3,150)
• Loss at Stop: USD 2,250 ((360 – 382.5) x USD 100 = -2,250)
• Reward-to-Risk: 1.4x
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
Disclaimer
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