There’s No Place Like Home: The Residential Reits Opportunity

Key takeaways:

  • Recent acquisitions of listed residential REITs by major private real estate operators like Blackstone highlight the significant opportunity created by the listed versus private valuation gap and the constructive long-term outlook for listed real estate.
  • The listed residential sector has generated attractive long-term returns driven by supportive demographic trends, an undersupply of housing in most global markets (something likely to be accentuated in the years ahead), and a desire for affordable and well-managed rental homes.
  • Relative to other property types, US residential assets benefit from lower debt pricing and availability, backed by government-supported debt markets, limited sales, and lower distress levels.

As we have highlighted before, the private commercial real estate market has dominated media headlines and has been slow to adjust reported values as the macroeconomic background changes. This is the opposite for the listed/public market, which is forward looking, being priced daily in stock markets, with valuations very much already reflecting the negative impact of higher rates on underlying property values. This means listed real estate investment trusts (REITs) are trading at wide discounts to private asset values having already “priced in” the impact of higher rates, and today stands to benefit from a reversal in the direction of interest rates.

How do we evidence this? One key indicator is that the private real estate sector is taking advantage of the significant valuation gap between private and listed real estate, to reap the existing value in listed REITs today. Recently, Blackstone, the largest private operator announced it is acquiring listed upscale coastal apartments REIT, Apartment Income (AIR Communities), for approximately US$10 billion. This follows on from an earlier acquisition this year, Canadian REIT Tricon Residential, a portfolio of mainly single-family homes in the US Sunbelt region in January for US$3.5 billion. With both deals struck at more than a 20% premium to the prevailing share prices, we see this as illustrative of the attractive pricing of listed residential REITs (and the wider listed REIT sector).