This year, inflation reached a 40-year high, the Dow Jones US Real Estate TR Index was down -17.96% YTD through Aug-2022, and short-term rates increased by +2.25% cumulatively over the same period. At a current discount value of approximately -10% to NAV, REITs may be undervalued.
We do not believe the current market environment will result in a repeat of the Global Financial Crisis. Rather, we believe this is a mild business cycle recession with plenty of NOI growth on the horizon. We believe continued robust NOI growth is driving the higher return expectations for REITs.
Inflation, interest rates, and NOI growth are interconnected and US CPI is on the rise. Over the next 5 years, REITs are expected to grow ~5% NOI per year, a rate much higher than preceding pre-COVID years. We believe the outlook on REIT returns from here is much better than it was six months ago.
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