The US real estate investment trust debt markets, a key component of the commercial real estate fixed-income universe, is too US-centric to feel many ripple effects from the Russian invasion of Ukraine, according to Thierry Perrein, a managing director at brokerage firm Stifel Nicolaus.
“When you buy into a REIT, you’re buying into a domestic play,” Perrein said. Very few US REITs have international allocations, and only one or two global industrial players have any exposure to either Ukraine or Russia. Still, fears over the conflict’s effect on global credit markets could stall REIT activity. “Increasing uncertainty slows the pace of transactions. And it slows the pace of making decisions,” he added.
Yet, REIT bond buyers tend to be institutional investors and savvy professionals who are not easily rattled. “It’s commercial real estate. So investors pretty much understand the risk implications as a result of a conflict,” Perrein added.
Spreads largely unaffected
Despite widespread confusion and concern over the situation in Ukraine, most investment-grade REIT bond yields have remained attractive. This is largely due to relative advantages over the still very low-yielding 10-year Treasury, which was hovering in the range of 1.99 percent on Thursday afternoon. By comparison, the benchmark US government bond started the year at about 1.75 percent.
Perrein noted that new BBB-rated REIT debt is priced slightly lower than their corporate equivalents. “We’re about 12 basis points behind, which is basically pretty much in line with historical norms,” he said.
Issuance may be pausing
New REIT issuance has been sparse since the conflict started, with no new issues coming to market since March 3. But Perrein cautioned against reading too much into any lack of activity in the new issue or secondary markets.
“What you’ve got to keep in mind is the vast majority of investors in REITs are what we refer to as ‘buy and hold accounts,’” Perrein said, noting buyers are often life insurance companies or investors with a similar profile. “[These investors] hold the paper to maturity.”
The Ukraine conflict aside, Perrein is not expecting a major issuance year for REIT debt this year. In his 2022 outlook, he projected that REITs could issue about $30 billion of senior notes this year, in part because the sector entered the year with few maturities.
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