Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 608

REITs: a haven in a Trumpian world?

The dramatic changes to U.S. tariffs settings challenges the financial market’s Trump pro-growth market narrative which heralded the start of 2025. Instead, investors now face conditions which look likely to invoke a global economic slowdown, if not recession, with significant pressure on corporate earnings from higher costs together with unsettled consumer demand and production patterns.

Regardless of where Trump’s tariffs settle, the market is coming to terms with higher risk hurdles when assessing investments. Whilst we cannot be sure about absolute outcomes, in this environment we believe REITs are relatively well placed to produce competitive risk adjusted returns. As we will explain, income security generated by select real estate combined with the operating and capital strength of REITs underpin our belief.

The fundamentals underlying our optimism

We see the biggest threat to our constructive thesis on REITs relate to a scenario involving the onset of stagflation and acknowledge that a deep and extended period of economic contraction will increasingly weigh on real estate returns. We also can not dismiss the possibility of additional imposts on real estate as Trump seeks to find alternate sources of income to provide tax relief for businesses and ordinary citizens. Given Trump’s background, this latter risk would be somewhat surprising.

Our reasons for optimism are starting to play out. Whilst Global REITs have not been spared in the broad sell down of publicly market investments, as investors seek less economically sensitive areas of the market they have outperformed broad equities thus far in 2025. Thanks to underlying strong fundamentals, we believe there is scope for this trend to continue.

Figure 1: Global Equity Performance CYTD

Source: MSCI World Index (Local Currency). 07 April 2025

Importantly, to date, bond yields have been relatively stable and there is room for central banks to reduce interest rates should there be clear evidence of a rapidly deteriorating economy and/or reduced consumer price inflation. That said, core inflation dynamics remain challenging, and central banks will be loath to repeat the mistakes of past stock market corrections such as that which occurred post the 1987 crash when emergency rate cuts fuelled higher inflation. Whilst REITs will not be totally immune, their earnings are less sensitive to slowing economic activity and increasing costs pressures.

Critically, real estate and REIT earnings are not directly affected by changes to tariffs.

From an operating expense perspective, REIT outgoings largely relate to property taxes, repairs and maintenance, property management and insurance. Hence, by and large, these are unaffected by tariffs.

In many underlying real estate categories, REIT revenue (rental) streams are relatively secure thanks to medium to long-term lease contracts, often three to 10 years in duration, which provide cashflow security. Where these lease structures are common, industrial and office property are perhaps the most vulnerable to a prolonged economic slowdown thanks to diminished tenant demand. We are significantly underweight REITs with office and warehouse exposures, in total representing less than 15% of the portfolio, with the U.S. being less than half this figure.

In other segments such as residential, self-storage, and hotels, income is often derived from short term lettings. In some of these instances, occupier demand is needs-based and hence income tends to be relatively resilient. Clearly hotels are the most economically sensitive to which we have minimal exposure. Of course, this income profile is subject to tenant credit. We would note that the largest single tenant underlying our REIT property portfolios generates less than 2% of total portfolio income [Astria Senior Living].

Furthermore, increased tariffs will put further upward pressure on building material replacement costs, making real estate development economics even more challenging unless rents rise meaningfully. Of course, tenant demand is critical but weaker demand will not be compounded by a growing supply overhang and in an environment where real estate vacancy rates are historically low.

For broader equities investors, we believe the picture is more challenging. Trump’s policies are likely to put pressure on corporate profits and margins as businesses will find it difficult to pass on the full cost of higher import prices to their customers. De-globalisation will create other challenges including sources of production, re shaping of supply chains and capital needs for businesses. We expect in this environment greater investor scrutiny on fundamental value and real cashflows from business models that have been over hyped and overpriced.

Figure 2: Relative EV/EBITDA spreads

Source: Resolution Capital. Spreads calculated as EV/EBITDA difference between FTSE EPRA Nareit Developed Index and MSCI World Index. 28 February 2025

Crucially, we do not believe current REIT earnings multiples takes into account the key replacement cost dynamic. Based on this fundamental tangible quality, by our estimates, commercial real estate is currently trading at/below replacement costs with low new construction. Consequently, REITs multiples appear on the surface to be very undemanding versus broader equities. Hence, the sector could benefit from investors continuing to rotate from more economically sensitive sectors into more defensive cashflows. It is reasonable that investors will view real estate as being a relatively secure investment and generating meaningful income distributions (REIT legislation requires a substantial payout of after depreciation earnings).

From a capital perspective, the REIT sector is in a strong financial position. By and large, the sector doesn’t require meaningful additional debt or equity to meet any additional capital commitments, dividends are covered by operating cashflows and refi needs are manageable. Indeed, REIT capital structures are arguably stronger today than in any period entering an economic slowdown over the past 30 years. Most debt is structured with fixed interest rates generally for more than three years, cushioning earnings from short term market rate volatility.

Whilst an outcome of bottom-up analysis, towards late 2024 and into early 2025 we reduced our exposure to the U.S. REITs and are now meaningfully underweight the U.S. market for the first time since 2015. We have positioned the portfolio away from the more economically sensitive sectors and little development exposure. REIT capital structures are robust and at this stage we see no need to meaningfully increase cash levels. In addition, we will continue to focus on those REITs best placed to withstand more challenging tenant demand conditions.

 

Andrew Parsons is a Co-Founder and Chief Investment Officer at Resolution Capital, an affiliate manager of Pinnacle Investment Management. Pinnacle is a sponsor of Firstlinks. Resolution has launched the only active GREIT Fund in Australia (ASX:RCAP).

This article is for general information purposes only and does not consider any person’s objectives, financial situation or needs, and because of that, reliance should not be placed on this information as the basis for making an investment, financial or other decision.

For more articles and papers from Pinnacle Investment Management and affiliate managers, click here.

 

RELATED ARTICLES

100 years of tariff lessons

Tariffs are a smokescreen to Trump's real endgame

Should America follow Australia with a sovereign wealth fund?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.