Why real estate has remained resilient

By Sergiy Leysk, director, research & analysis

Since the start of the COVID crisis, real estate equities have faced significant headwinds, with different segments of this market suffering to varying degrees. 

By the end of 2020, the FTSE EPRA Nareit Developed Index had underperformed the FTSE Developed Index by almost 30% in US dollar terms.

Moreover, since August 2020, listed real estate equities have been confronted by a new challenge ‒ rising bond yields (Figure 1) as a higher discount rate and cost of capital would tend to imply lower equity valuations.

Since the great financial crisis (GFC), there were two notable periods when bond yields have risen significantly: The 2013 “taper tantrum” and the 2009 post-crisis recovery. But for each period, listed real estate equities performed differently.

Taper tantrum

The last time bond yields jumped by a similar stark 1% was during the so-called 2013 “taper tantrum,” when real estate equities underperformed by more than 15% from the end of May 2013 to the end of that year, as Figure 2 shows.

Recovery in 2009

In contrast to the 2013 taper tantrum, during the post-crisis market recovery in 2009, real estate equities outperformed the wider equity market as bond yields rose (Figure 3).

However, real estate performance during the COVID-19 phase is reminiscent of what was observed during the post Global Financial Crisis recovery.

After the initial COVID shock in March 2020 and sharp decline, listed real estate equity returns held up relatively well versus the wider equity market, while bond yields rose.

One of the reasons for their relatively stable performance might be explained by the rising bond yields and changing weights structure of the listed real estate sector.

Inflation fear is one consequence of rising bond yields. Similarly to the period immediately after the GFC in 2009, the market is fearful of rising inflation stemming from significant monetary expansion by central banks to stimulate the global economy.

As previous research demonstrated (see references [1]-[3]), higher inflation expectations are particularly supportive of residential real estate prices. We have witnessed recently that residential is one of the best performing components of listed real estate.

There are other reasons for strong performance of residential real estate, for example, the structure of financial support for business and households during the COVID crisis, stamp duty relief in the UK and ban on evictions in the US, to name just a few.

Investors should exercise caution going forward, however. Some drivers of the real estate price growth may be removed and investors need to watch the space.

This post first appeared on May 27 on the FTSE Russell blog.

Photo Credit: kjarrett via Flickr Creative Commons


[1] Fama E., Schwert, G. Asset returns and inflation. Journal of Financial Economics, 1977, 5, pp. 115-146.

[2] Rubens, J., Bond, M., Webb, J. The inflation-hedging effectiveness of real estate. Journal of Real Estate Research. 1989. 4, pp.45-46.

[3] Bill Wheaton. Has Real Estate Been a Good Hedge Against Inflation. CBRE blog July 2017.

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