A renewed interest in Real Estate has emerged as declining interest rates tend to bring more favorable conditions to the industry. For 16 of the last 31 years, the Real Estate sector has outperformed the broader developed equity market.1The COVID-19 pandemic struck at the core of the Real Estate sector by shutting down offices, hotels, retail stores and more, while subsequent interest rate hikes by the U.S. Federal Reserve to mitigate inflation led to a divergence between these indices. Together, these challenges have hampered recovery efforts, keeping Real Estate index performance in negative territory.However, as the pandemic subsided, inflation was brought under control and interest rates started to decrease, interest in Real Estate re-emerged. This past year, Real Estate indices have experienced a resurgence in performance, with the up 31.2% for the one-year period ending September 2024 (see Exhibit 1).(Click on image to enlarge)
“Green” Real Estate investments have attracted global market interest, especially as reports show that total energy consumption and CO2 emissions in 2021 surpassed pre-pandemic levels, falling short of 2050 decarbonization goals.2 This trend makes benchmarks like the a critical tool to denote the index constituents that demonstrate improved sustainabilty credentials and reduce physical risk exposure at the index level. Exhibit 2 provides a closer look at the key methodology attributes and data sources used in the index.(Click on image to enlarge)
Exhibit 3 shows that the index has historically tracked its benchmark very closely, which is consistent with a low tracking error.(Click on image to enlarge)
Similar to traditional Real Estate indices, the index has historically performed better during periods of decreasing rates, and it has historically underperformed when rates rise. This could be expected, as rising rates tend to decrease the profitability of Real Estate investments. For example, between Dec. 31, 2021, and Oct. 24, 2023, when the 10-Year U.S. Treasury rate increased by 343 bps, the Dow Jones Developed Markets Select RESI (USD, TR) lost 32.1%. Conversely, between Oct. 31, 2023, and Sept. 30, 2024, when the 10-Year U.S. Treasury rate dropped 114 bps, the index was up 38.8%.Historical performance that closely tracks its benchmark is only part of the story; Exhibit 4 shows that the Dow Jones Developed Green Real Estate Index generates strong score improvements relative to the underlying index.(Click on image to enlarge)
ConclusionThe Dow Jones Developed Green Real Estate Index measures Real Estate companies through an ESG lens. By integrating environmental data and rigorous selection criteria, the index serves as a benchmark for market participants to monitor not just performance but also ESG improvements of the Real Estate sector as companies in the sector seek to align with developing global sustainable initiatives.1 Reference is based on the Dow Jones Developed Markets Real Estate Index and the Dow Jones Developed Markets Index, which are sub-indices of the .2 Source: U.N. Environment 2022 Global Status Report for Buildings and Construction Towards a zero-emissions, efficient and resilient buildings and construction sector. .More By This Author:
Introducing The Dow Jones Developed Green Real Estate Index
