Physical property is not highly liquid which means it takes longer for pricing to reflect changing fundamentals such as rising interest rates or a worsening economy. In financial markets liquidity is instant: prices adjust quickly to changing fundamentals. In fact, markets go a step further to anticipate future fundamentals.    

Although the FTSE100 index is flat on the year, UK property stocks have seen steep declines of up to 40-50% with the diversified UK property REIT ETF down over 30%.  At the same time, house price indexes still appear steady on the surface – both Nationwide and Halifax are showing October house price data falling by less than 1% (Nationwide -0.9%, Halifax -0.4%).  In essence, physical transactions data is backward looking whilst stock markets are forward looking.   

This dichotomy between the physical and financial markets could be viewed as an opportunity. For example, you can acquire commercial and residential assets in traded REITs with deep discounts to their Net Asset Values (NAV). They also currently offer good yields.  

Before discussing REITs in more detail let’s take stock of where the wider equity markets are currently, from a historical perspective.

Big bears are opportunities
It’s not often that equites experience a major sell-off. The FTSE is flat this year, but US equities are down 28% (Sterling weakness will have offset some of this for GBP-based investors). For the US market that equates to a major bear market – bears of this size are rare.  

The previous major bear market in the US was sparked by the Covid crisis: equities dropped 22%, bottomed in March 2020, before climbing nearly 70% over the following two years. The one before that (2008-09 financial crisis) declined by more than 40% and then went on to gain 600%+ in 12 years.