What's really holding back REITs and the real estate market?

While the stock indices of the global stock exchanges continue to break new highs on a daily basis, fueling a certain euphoric climate within the so-called "everything rally", the market segment of real estate trusts (REITs) and, more broadly, that of Real Estate, continues to show a bearish sideways trend.
What ails this market sector? Why does the REITs market continue to decline? Taking a look at the real estate market, focusing on trust companies, real estate trusts, commonly known in Anglo-Saxon language as REITs, it is easy to realize how the various stock market indices do not yet seem intent on continuing their upward trend, unlike good part of the other asset classes in this particular historical moment, not surprisingly called the "everything rally".
Taking the FTSE EPRA/NAREIT Developed Dividend+ index as a reference, which replicates the performance of real estate companies and REITs around the world except Greece, a fluctuating trend can be seen.
The increases generated at the end of 2023 alternated with a lateral bearish trend that began with the start of 2024.
A certain parallelism is therefore immediately clear between the price trend of global REITs and the trend of expectations regarding the level of interest rates in developed economies, the United States and Europe in particular.
This is because REITs have a business model that is highly dependent on the cost of financing their business, which naturally, in a context of high interest rates, is higher, as happens in the real estate market understood in a broader sense.
It is no coincidence that the majority of fallen angel companies, which have had their ratings downgraded by global agencies, are real estate trusts.
What are the largest REITs driving the market? Starting from the study of some funds and ETFs that aim to replicate the general trend of the market, it is possible to identify some of the most representative and impactful REITs at a global level.
Among the largest real estate trusts is Prologis Inc.
Currently, the shares have a negative YTD return of just under -3%.
Since the launch of the company, however, the REITs have demonstrated good performance capacity, recording growth of just over 50%.
In 2023, it had a P/E of 40, therefore significantly higher than the average, with a net profit margin, also anomalous compared to peers, equal to 38%, a figure significantly lower than the previous two years, a period in which the same figure even reached the level of 61%.
And it is precisely for this reason that the P/E has increased.
In essence, the change in economic conditions has had a negative impact on the company's activities, and this is a fairly indicative view of the market to which it belongs.
In fact, even the broader market segment of Real Estate remains one of the few that has not yet managed to recover ground in the face of the "everything rally": for example, the S&P500 Real Estate index has a YTD performance equal at almost -5%, while in Europe, the STOXX Europe 600 Real Estate index has a negative return of just under 4%.