REITs see best start versus equities in a decade: Principal AM

Listed real estate investment trusts (REITs) are off to one of their strongest starts relative to equities in the past decade, according to Principal Asset Management, which sees the asset class as a compelling opportunity for navigating a challenging year ahead.

Principal Asset Management chief investment officer and portfolio manager Kelly Rush explained that a notable defensive rotation is underway this year, benefiting REIT stocks.

Rush said President Trump's "ambitious policy actions" aimed at reshaping the US economic landscape and foreign policy have created greater uncertainty in markets and the economic outlook, and consequently, defensive areas of equity markets are outperforming.

That dynamic has played out clearly in US REITs, which are enjoying their strongest relative start to the year against the S&P 500 since 2008 and their fourth best since 1999.

One reason for the asset class's resilience, hesaid, is that REITs are "relatively insulated" from tariffs and other Trump policies.

He said while tariffs have no direct impact on listed REIT companies, the indirect effects are harder to predict, given the pace and unpredictability of the Trump administration's trade policy changes. The worst-case scenario is that tariff-induced inflation could lead to US stagflation.

He said rising yields and slowing growth would be a headwind for real estate unless the Federal Reserve cuts rates to support employment. However, even if a moderate recession occurs, or if the US manages to avoid one, REITs are likely to outperform equities.

This outlook, he said, is underpinned by "tailwinds from easing monetary conditions" and a "defensive market rotation."

Rush added that the current investment case for REITs rests on two ingredients already in place, cheap valuations and positive fundamentals. However, what's been missing in recent years, is the third, and often most important ingredient, accommodative interest rates.

"Yields have been volatile from one quarter to the next and moving higher year-after-year. The result has been a generational repricing of listed REITs and real estate since 2022," he said.

But trends have shifted year-to-date, with yields easing and concerns about slowing economic growth gaining traction. Lower long-term yields, he said, are a positive for this longer-duration, rate-sensitive asset class.