A new chapter for real estate: Rate cuts and the rise of tech

Key Takeaways

With the US Federal Reserve (Fed) announcing a rate cut on 18 September 2024, we have entered a new phase of monetary policy. While this decision aligns with market expectations, it could significantly impact various sectors. Historically, real estate indices have shown a negative correlation with interest rates in recent years. Furthermore, as technology continues to integrate into the real estate sector, areas such as data centres, modern logistics, and telecom towers exhibit strong growth potential. We believe that tech-focused real estate could emerge as a key growth area within the broader real estate market.

Rate cuts: A boost for real estate?

Many factors influence the real estate sector, but interest rates have played a critical role recently, especially since the Fed began its rate hike cycle in March 2022. Figure 1a illustrates the recovery of real estate indices from the pandemic lows in early 2020, during which the Fed funds rate remained near zero (0-0.25%). We compare two key real estate indices:

• FTSE EPRA Nareit Developed NTR Index (TRNGLU) – A global benchmark in USD
• CenterSquare New Economy Real Estate UCITS NTR Index (CSNEREUN) – A tech-focused real estate index

Both indices posted considerable returns when the interest rate was low, while the global benchmark was hit more severely than the CSNEREUN in early 2020. At this stage, the zero-interest rate policy provides abundant liquidity, greatly boosting the real estate sector.

Figure 1a: Performance of real estate indices and the level of the Fed funds target rate

Source: WisdomTree, Bloomberg. Weekly data sourced from 30 September 2019 to 30 September 2024. Index performances are based on the USD term. You cannot invest directly in an index. Historical performance is not an indication of future performance, and any investments may go down in value.

However, as the Fed started to increase rates in March 2022, this upward trend slowed. Figure 1b highlights how real estate indices moved in tandem with the US 10-year government bond yield, which better reflects market expectations regarding interest rates. Initially, the indices declined as rates rose, but as inflation stabilised and expectations of rate cuts increased, the sector regained some drivers. The correlation between real estate indices and interest rates, shown in Figure 1c, has been around -50%, suggesting that the new rate cut cycle could provide a tailwind for the sector.

Figure 1b: Performance of real estate indices and the level of US 10-year government bond yield

Source: WisdomTree, Bloomberg. Weekly data sourced from 30 September 2019 to 30 September 2024. Index performances are based on the USD term. You cannot invest directly in an index. Historical performance is not an indication of future performance, and any investments may go down in value.

Figure 1c: Correlation between real estate indices and US 10-year government bond yield

Source: WisdomTree, Bloomberg. Periods from 30 September 2019 to 28 March 2022 and from 28 March 2022 to 30 September 2024 respectively. Based on weekly returns for the indices in USD. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investments may go down in value.

Tech-driven real estate growth

While interest rate cuts can boost the broader real estate sector, tech-focused real estate assets, such as data centres and telecom towers, are uniquely positioned to capitalise on technological advancements. Both the broader real estate index (TRNGLU) and the tech-focused index (CSNEREUN) have rallied this year and posted similar returns over the past few years (see Figure 2a). However, a closer look at the industry breakdown reveals notable differences.

Figure 2a: Performance comparison

Source: WisdomTree, Bloomberg. As of 30 September 2024. Calculations include backtested data. The CenterSquare New Economy Real Estate UCITS Index started its live calculation on 15 September 2021. Indices are computed in the US Dollar terms and on NTR (net total return) basis. Returns for periods over 1 year are annualised. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investments may go down in value.

The broader real estate index includes a significant portion of non-tech REITs (e.g., residential and retail properties, see Figure 2b). While these sectors may benefit from falling rates, they are less likely to capture the growth opportunities associated with technology megatrends. On the other hand, tech-focused real estate, represented by the CSNEREUN index, is built to capture several key trends driven by technological innovation:

• Generative AI Cloud computing is transforming how software and computer resources are used, with data centres requiring specially designed warehouses to operate
• 4G and 5G connectivity is gaining momentum, but it depends on telecommunication tower sites for expansion
• Logistics and supply chains rely on specialised warehouses for fast delivery, including refrigerated storage, which ensures food is transported within regulatory guidelines
• The life sciences industry is growing, with laboratories being essential real estate for supporting biotech advancements

Figure 2b: Segment breakdown

Source: CenterSquare, Bloomberg. As of 19 September 2024. The Global benchmark is the FTSE EPRA Nareit Developed Index. The New Economy Real Estate Strategy is CenterSquare New Economy Real Estate UCITS Net Total Return Index. Tech Tenants are represented by the “Office” and “Diversified” sectors within the New Economy Real Estate UCITS Index.  *Companies within the “Hotel” sector classified as having low sensitivity to technology are reflected under “Non-Tech REITs” category. You cannot invest directly in an index. Historical performance is not an indication of future performance, and any investments may go down in value.

Although the performance of the CenterSquare New Economy Real Estate UCITS Index and the FTSE EPRA Nareit Developed Index has been similar over the past few years, the former has shown stronger growth in terms of FFO¹ per share, dividends and EBITDA² (see Figure 2c). This indicates the strong potential of tech-focused real estate and highlights the alignment between technological progress and real estate performance.

Figure 2c: Segment breakdown

Source: CenterSquare, Bloomberg. As of 19 September 2024. New Economy Real Estate Strategy is represented by the CenterSquare New Economy Real Estate UCITS Index. The Global benchmark is the FTSE EPRA/Nareit Developed Index. EBITDA is earnings before interest, taxes, depreciation, and amortization. You cannot invest directly in an index. Historical performance is not an indication of future performance, and any investments may go down in value.

One clear example of tech real estate’s growth potential is the increasing demand for data centres. McKinsey forecasts global spending on data centre construction to reach $49 billion by 2030. This significant investment stems from the need for advanced infrastructure to support the expanding AI ecosystem. As tech giants engage in an arms race to develop large language models (LLMs), the demand for state-of-the-art data centres continues to grow, reinforcing the importance of tech-focused real estate in the evolving market.

Figure 3: Data centre construction spending forecast ($bn)

Source: McKinsey & Company, “Investing in the rising data centre economy”. Historical performance is not an indication of future results and any investments may go down in value.

Conclusion

The CenterSquare New Economy Real Estate UCITS Index is heavily weighted toward tech-related real estate, such as logistics, telecom towers, and data centres. In contrast, broader benchmarks like the FTSE EPRA Nareit Developed Index include more non-tech REITs, such as residential and retail properties. In addition to the potential boost from falling interest rates, tech-driven catalysts – such as increased AI and robotics applications in logistics and growing demand for data centres – could drive further growth in this sector. 

Source

1 FFO, short for funds from operations

2 EBITDA, short for earnings before interest, taxes, depreciation, and amortisation