Financial

3Q 2021 Review And Outlook

With all the talk about rising rents and the overall strength of the U.S. housing market, I thought it would be good to see how Fundrise’s various real estate funds have performed in this environment. At the end of the day, we can talk all we want, investment performance is what matters most.

Fundrise is a real estate investing platform that began in 2012. It specializes in private residential real estate, but has investments in various types of commercial real estate as well. The company currently manages over $1 billion in assets from over 150,000 investors.

With permission from Fundrise, let me share with you their 3Q 2021 investment letter to shareholders. Given the strength of the returns, I had to double check to verify the performance figures were indeed quarter-over-quarter and not year-over-year.

You will see a consolidated performance chart at the end of the post.

Fundrise Investment Performance Update 3Q 2021

To paraphrase Hemingway, megatrends happen gradually, then all at once. While the notably strong performance of the portfolio over the last quarter may feel sudden, it was in fact many years in the making and the result of a number of different factors, rather than a single event.

For Q3, several of our funds (driven mainly by equity investments in residential assets) experienced a level of price appreciation that is uncommon in the world of real estate.

In some instances, certain investments saw quarter-over-quarter price appreciation at the property level in excess of 50%. Our balanced and growth focused funds reporting NAV increases over the last quarter ranging from 0.59% to as much as 20.91%.*

We focus specifically here on our balanced and growth strategies. It is those funds that derive their returns primarily from asset appreciation and as a result saw such strong results.

All told, performance over the last 90 days from an appreciation standpoint was arguably the strongest we’ve experienced since the inception of the Fundrise platform.

Today, our conviction about our general investment thesis is as high as it’s ever been. However, it’s worth calling out this type of disproportionate performance over a single quarter is not likely to be repeated.

Focusing On The Long Term

That isn’t to say that we do not expect to see strong performance going forward. In fact, quite the contrary. We seek to identify and invest in large macroeconomic trends to drive outsized growth. This in in turn can deliver better than average performance.

Of course investors who have been with us for a while will also be familiar with the refrain that such success is never guaranteed. All investments carry risk which could lead to loss.

Instead, it is recognition of the fact that a fundamental advantage of being a long-term investor is we do not have to attempt to time the market. Rather we can be patient. We can design and execute strategies that allow those trends time to play out at their own natural pace.

Focusing on the long-term also ensures we capture those rare moments when a confluence of factors come together to bear truly remarkable fruit.

Reasons For Strong Performance

While the broader portfolios of our various funds saw positive overall performance, the primary contributor to the outsize returns came from equity investments in and ownership of well-located, affordably priced residential properties.

More granularly, the primary contributors to this price appreciation were:

  • Outsized rent increases caused by a post pandemic spike in demand combined with ongoing limitations on the supply of housing
  • Accelerated Sunbelt growth whereby the existing dynamics of strong population and job growth that we’ve discussed previously were amplified by the pandemic-driven migration of both people and companies to the region
  • Increasing institutional demand for well-located, cash-flowing residential real estate assets paired with record low interest rates and compressing cap rates (i.e., return expectations)

Although most of these trends have existed for several years and are likely to continue for the foreseeable future, the coronavirus pandemic created a unique inflection point. It resulted in what otherwise may have been 10 years of gradual change being condensed into the span of 12 months.

Multifamily Rent Growth And Cap Rate Compression

The above graph shows the surge in residential apartment rents that have occurred over the past 6-12 months.

While the below image demonstrates the “cap-rate compression”, or in other words the lower overall return demanded by the market for the same assets. (Falling cap-rates and discount rates result in higher property prices, all else being equal).

Historical cap rate compression since 2015 through 3Q 2021

Real Estate Price Expectations

Looking ahead, we continue to believe many of the same macro trends that we’ve been focused on over the last few years will continue to be dominant drivers of growth going forward. While a few new pandemic created norms will likely also have an impact on our investment strategy. Specifically we believe that:

1) The Sunbelt will continue to outperform

The same tailwinds that have driven so much price appreciation in the region over the past year should continue to exist: population growth, job growth, housing affordability, warmer weather, demographic shift.

And now, with remote work seemingly here to stay, we believe the area is only that much more likely to attract new residents who otherwise would have been tied down by jobs in cities such as New York, San Francisco, Los Angeles, and Washington, DC.

Related: Focus On Trends: Why I’m Investing In The Heartland Of America

2) Remote work will permanently alter both office and residential real estate

We see technology enabled remote work as a megatrend with parallels to e-commerce adoption in the early 2000s. More and more people will now have greater control over their time. They will have increased flexibility over where they choose to both work and live.

As a result, we expect many people will choose to move from high cost of living cities with cold winters to low cost of living cities with milder winters.

According to Redfin, the average single family home in northwest Washington DC costs $1.5 million vs., for example, Raleigh where it is $427,000. That extreme gap in value provides a compelling reason for a millennial family or retiring Boomer to move southward now that they can do so without sacrificing their career.

Anecdotally, we at Fundrise the company opted to shift to a remote first working environment during the pandemic. We recently completed a survey where we asked our team members if they would prefer to continue under that model or switch back to a traditional full-time in-office environment. More than 85% of respondents said they preferred either a majority-remote or full-remote model.

We believe the long-term consequences of this playing out across thousands of companies nationwide. As a result, there will likely be a shift in value from traditional big core office and apartment properties in dense urban areas to single-family homes and more suburban environments.

3) E-commerce will continue to eat retail

While this trend is nothing new, the move towards greater e-commerce adoption only accelerated over the past 18 months. Many customers who otherwise may have never considered shopping online for items like groceries or everyday household goods were forced to make the switch. Now they will likely never fully give it up. This same trend can be seen in data around meal delivery and other consumer shopping trends as well.

The end result of ever increasing online sales with the constant expectation for 2-day, 1-day, or even same day delivery means a greater need for well located industrial logistics facilities.

4) The rise of software technology as an integrated part of our physical spaces

Marc Andreesen said software is eating the world. But until very recently the physical world and the digital world were very much separate. But a wave of new software tech such as AR, VR, voice command, along with innovations in new and greater mobile and other hardware (watches, rings, glasses, etc…) is starting to blur that line.

Smart home systems can not just control your thermostat or notify you when someone is at the door. Increasingly they are predicting and preventing costly home maintenance issues. Or they are providing on-demand service solutions for everyday chores like house cleaning or lawn care.

Mobile-only restaurants now exist where the entire brand and experience of the business exists only digitally while the food is prepared in a ghost kitchen and sent out via a delivery app.

For a long time real estate investing and technology investing were two very different spheres. But looking ahead the two may become increasingly one world.

3Q 2021 Performance Review Wrap Up

The table below reflects the NAV changes of only balanced and growth focused funds. Income focused funds, which collectively saw NAV changes of between approximately -0.30% and 0.39%, have been excluded due to the fact that the majority of the returns realized by such funds are through distributions and not appreciation.

Fund Name NAV as of Jun. 30 NAV as of Sep. 30 Change
Interval Fund $10.79 $12.10 12.14%
Growth eREIT $14.90 $17.67 18.59%
East Coast eREIT $12.68 $13.68 7.89%
Heartland eREIT $11.42 $13.29 16.37%
West Coast eREIT $10.14 $10.20 0.59%
Growth eREIT II $11.22 $12.41 10.61%
Growth eREIT III $11.43 $13.82 20.91%
eREIT XIV $10.11 $10.28 1.68%
Growth eREIT VI $10.53 $11.07 5.13%
Balanced eREIT $10.48 $11.50 9.73%
Growth eREIT VII $10.23 $10.65 4.11%
Balanced eREIT II $10.24 $11.63 13.57%

In summary, we are thrilled to see such exceptional returns over the past quarter. They are a testament to both the hard work of the team as well as the value of identifying the right macro trends. However, as usual, we also want to manage expectations. It would be a mistake to celebrate this performance without acknowledging that it represents years of groundwork previously laid.

The nature of great performance is that it is non-linear. Sometimes, it pops. Sometimes, it slows. The key is to always be making steady progress. And again, while success can never be guaranteed, we’ve intentionally designed Fundrise with this idea in mind.

Our goal is to make it possible for our investors to leverage technology and benefit from the opportunities that it can unlock over the long-term. We will continue to work everyday to build on the foundation we’ve created.

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Until then, onward.

Ben and the entire Fundrise team

Source
3Q 2021 Review And Outlook is written by Financial Samurai for www.financialsamurai.com

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