Funds that invest in real estate generally had a tough time in 2023.
With interest rates at their highest levels in decades, the financing and refinancing needed for many formerly cheap real estate deals started to look a bit pricey. Real Estate Investment Trusts, which are many times traded on public exchanges, lost about 21% of their value from January 2022 to the start of last December, according to the National Association of Real Estate Investment Trusts, or Nareit.
But even amid that turmoil, advisors with discerning eyes and a bit of luck could find some worthwhile real estate deals for their clients in 2023. Data from Morningstar Direct show the top 20 real estate-related funds offered returns ranging from 25% to just under 14% in 2023.
True, that may not seem like much in a year when the tech-heavy NASDAQ was up by a whopping 43%. But it also provides little reason to abandon real estate funds, especially for advisors who are looking for ways to diversify their clients' portfolios.
The top 20 performers ranged from funds that invest in a large variety of real estate to funds specializing in a specific type of property, such as data centers. The No. 1 spot went to the Baron Real Estate International fund, or BREIX, which puts money into everything from homebuilding and casinos to REITs centered on industrial property and data centers. It returned about 25% in 2023 and was sitting on slightly more than $1.7 billion by the end of the year.
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The Global X Data Center REITs & Digital Infrastructure ETF, in the No. 3 spot, is meanwhile designed to invest mainly in REITs that have money in data centers, cellphone towers and other digital infrastructure. It returned just over 18% last year and had $50.6 million at the year's end.
In a podcast released on Jan. 11, John Worth, the executive vice president for research and investor outreach at Nareit, noted that large institutional investors are turning more and more to REITs to diversify their investment holdings. Worth noted that a recent survey, presented to about 110 institutional investors in North and South America and conducted by Cornell University and the consultant firm Hodes Weill & Associates, found that 43% of the respondents had real estate in their portfolios.
"But when you look at the largest, most sophisticated investors, those with more than $50 billion, that number jumps to 65%," Worth said. "And we think that we're going to continue to see institutional investors increasingly understanding that REITs have really been innovators. They've been the first movers into a number of important property sectors."
Worth also predicted a strong year ahead for REITs. One reason for his optimism is the widespread expectation that the Federal Reserve will start lowering rates this year after finding it has sufficiently tamed inflation.
"Historically, when we've reached a period at the end of a Fed tightening cycle — that is, the Fed has been tightening, and then rates stabilized — rates have historically outperformed both private real estate and equities," he said. "And we think we saw a little bit of a preview of that in the end of the fourth quarter when REITs performed quite well, obviously up quite meaningfully for the fourth quarter, up by about 18%."
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