More lights are turning green for listed real estate in 2025
Guy Barnard, Co-Head of Global Property Equities continues to see the alignment of multiple supportive factors for listed REITs in 2025.
4 minute read
Key takeaways:
- Overall investor sentiment towards listed real estate investment trusts (REITs) turned more favourable in 2024 but was tempered by the market’s concerns around geopolitical factors and rate expectations.
- Underlying real estate fundamentals are recovering, with higher transaction volumes and favourable supply-demand dynamics, supportive of value and income growth in the year ahead.
- An allocation to listed REITs enables investors to capitalise on the sector’s defensive income streams and new growth opportunities.
We came into 2024 expecting an inflection point in the commercial real estate sector following two years of declines in the face of rising interest rates. As we stand today, this thesis seems to be playing out, albeit it’s been a year of ‘stop and start’, with geopolitical concerns and the markets’ expectations around rates oscillating, driving short-term sentiment toward listed real estate investment trusts (REITs).
One property CEO recently commented to us, “a lot of lights are now turning green”. Looking ahead, we’d like to highlight three key messages that continue to give us cause for optimism into 2025:
- We believe we have seen the bottom in most real estate property types and geographies – we are at the beginning of a new commercial real estate (CRE) cycle. Valuations have largely been reset and transaction volumes are increasing, with a greater breadth and depth of demand across investment markets. Higher transaction volumes should result in a firming and eventual increase of asset values. While rising interest rates necessitated the downward reset in real estate valuations, they also have made construction financing prohibitively expensive in most jurisdictions. Inflation has increased the cost of raw materials and labour required to build. As a result, many property types have seen new development starts grind to a halt, which means supply growth is likely to broadly decelerate for the next few years. Less oncoming supply and steady or growing demand is a recipe for increasing landlord pricing power in the years ahead.
- We continue to expect listed REITs to lead the recovery in CRE. Companies from property sectors that have benefited from structural trends, employed lower leverage (debt), and enjoyed an advantage in terms of cost and access to capital, with a pathway for growth have seen share price appreciation from the market. Welltower (US senior housing) successfully leveraged its best-in-class operational platform with more than US$6bn of accretive acquisitions (YTD through 3Q 2024) in a sector facing demographic tailwinds and limited new supply in the years ahead. Goodman Group in Australia has leaned into data centres as a pathway for further growth, with a pipeline in excess of 2.5GW. Meanwhile, Unite Group in the UK has partnered with capital-constrained universities to provide a solution to student housing needs.
- Listed REITs have continued to provide defensive and growing cash flows and dividends. The underlying operational fundamentals of many businesses remain robust, with occupancy high and rents rising. These factors can enable further cash flow and dividend growth in the year ahead. While the defensive nature of this cash flow has perhaps been a little unexciting in an equity bull market like 2024, it’s worth remembering the significant outperformance of listed REITs in spring/summer as the market became concerned about employment and economic growth prospects.1 In a year of broad-based positive returns and enthusiasm, having an allocation to an asset class that offers some diversification in the ‘What if?’ scenario we think, remains valuable.
The key reasons above lead us to think that real estate ‘works’ again from today’s valuations because listed REITs have been repriced for the current interest rate environment. High and growing dividend yields, defensive income streams and diversification versus the wider equity market, all support an allocation within a balanced portfolio.
Underlying real estate fundamentals remain steady; coupled with new growth opportunities ahead for the listed REIT sector, we believe the asset class can continue to outperform other forms of property ownership. Share valuations have rarely ever been more discounted relative to broader equities, while interest rates have turned from a headwind into something looking more supportive.
We may not yet be “off to the races” in the listed REIT sector, but more lights are turning green.
1 FTSE EPRA Nareit Developed Index vs MSCI World Index in USD terms. Past performance does not predict future returns. FTSE EPRA Nareit Developed Index tracks the performance of real estate companies and real estate investment trusts (REITs) from developed market countries. MSCI World Index captures the performance of large and mid-cap representation across 23 developed markets countries.
Cash flow: the net balance of cash that moves in and out of a company. Positive cash flow shows more money is moving in than out, while negative cash flow means more money is moving out than into the company.
Diversification: a way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.
IMPORTANT INFORMATION
REITs or Real Estate Investment Trusts invest in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares.
Real estate securities, including Real Estate Investment Trusts (REITs), are sensitive to changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, supply and demand, and the management skill and creditworthiness of the company. Additionally, REITs could fail to qualify for certain tax-benefits or registration exemptions which could produce adverse economic consequences.
Important information
Please read the following important information regarding funds related to this article.
Key investment risks:
- The Fund's investments in equities are subject to equity securities risk due to fluctuation of securities values.
- Investments in the Fund involve general investment, currency, liquidity, hedging, market, economic, political, regulatory, taxation, securities lending related, reverse repurchase transactions related, financial, interest rate and small/ mid-capitalisation companies related risks. In extreme market conditions, you may lose your entire investment.
- The Fund may invest in financial derivatives instruments to reduce risk and to manage the Fund more efficiently. This may involve counterparty, liquidity, leverage, volatility, valuation and over-the-counter transaction risks and the Fund may suffer significant losses.
- The Fund’s investments are concentrated in European property sector (may include small/ mid capitalization companies). It may be more volatile and subject to property securities related risk.
- The Fund may invest in Eurozone and may suffer from Eurozone risk.
- The directors may at its discretion pay distributions out of gross investment income and net realised/ unrealised capital gains while charging all or part of the fees and expenses to the capital, resulting in an increase in distributable income for the payment of distributions and therefore, the Fund may effectively pay distributions out of capital. This amounts to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the Fund’s net asset value per share.
- The Fund may charge performance fees . An investor may be subject to such fee even if there is a loss in investment capital.
- Investors should not only base on this document alone to make investment decisions and should read the offering documents including the risk factors for further details.
Key investment risks:
- The Fund's investments in equities are subject to equity securities risk due to fluctuation of securities values.
- Investments in the Fund involve general investment, currency, liquidity, hedging, market, economic, political, regulatory, taxation, securities lending related, reverse repurchase transactions related, financial and interest rate risks. In extreme market conditions, you may lose your entire investment.
- The Fund may invest in financial derivatives instruments to reduce risk and to manage the Fund more efficiently. This may involve counterparty, liquidity, leverage, volatility, valuation and over-the-counter transaction risks and the Fund may suffer significant losses.
- The Fund’s investments are concentrated in property sector and may be more volatile and subject to property securities related risk.
- The Fund may invest in Eurozone and may suffer from Eurozone risk.
- The directors may at its discretion pay distributions (i)out of gross investment income and net realised/ unrealised capital gains while charging all or part of the fees and expenses to the capital, resulting in an increase in distributable income for the payment of distributions and therefore, the Fund may effectively pay distributions out of capital; and (ii) additionally for sub-class 4 of the Fund, out of original capital invested. This amounts to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the Fund’s net asset value per share.
- The Fund may charge performance fees. An investor may be subject to such fee even if there is a loss in investment capital.
- Investors should not only base on this document alone to make investment decisions and should read the offering documents including the risk factors for further details.
Key investment risks:
- The Fund's investments in equities are subject to equity securities risk due to fluctuation of securities values.
- Investments in the Fund involve general investment, currency, liquidity, hedging, market, economic, political, regulatory, taxation, securities lending related, reverse repurchase transactions related, financial, interest rate and benchmark risks. In extreme market conditions, you may lose your entire investment.
- The Fund may invest in financial derivatives instruments to reduce risk and to manage the Fund more efficiently. This may involve counterparty, liquidity, leverage, volatility, valuation and over-the-counter transaction risks and the Fund may suffer significant losses.
- The Fund's investments are concentrated in the Asia-Pacific property sector and may be more volatile and subject to property securities related risk.
- The directors may at its discretion pay distributions (i) out of gross investment income and net realised/ unrealised capital gains while charging all or part of the fees and expenses to the capital, resulting in an increase in distributable income for the payment of distributions and therefore, the Fund may effectively pay distributions out of capital; and (ii) additionally for sub-class 4 and sub-class 5 of the Fund, out of original capital invested. This amounts to a return or withdrawal of part of an investor's original investment or from any capital gains attributable to that original investment, and may result in an immediate reduction of the Fund’s net asset value per share.
- The Fund may charge performance fees. An investor may be subject to such fee even if there is a loss in investment capital.
- Investors should not only base on this document alone to make investment decisions and should read the offering documents including the risk factors for further details.
Key investment risks:
- The Fund's investments in equities are subject to equity market risk due to fluctuation of securities values.
- Investments in the Fund involve general investment, currency, hedging, economic, political, policy, foreign exchange, liquidity, tax, legal, regulatory, securities financing transactions related and small/ mid-capitalisation companies related risks. In extreme market conditions, you may lose your entire investment.
- The Fund may invest in financial derivatives instruments for investment and efficient portfolio management purposes. This may involve counterparty, liquidity, leverage, volatility, valuation, over-the-counter transaction, credit, currency, index, settlement default and interest risks; and the Fund may suffer total or substantial losses.
- The Fund's investments are concentrated in companies (may include small/ mid capitalization companies, REITs) engaged in or related to the property industry and may be more volatile and are subject to REITs and property related companies risks.
- The Fund may invest in developing markets and involve increased risks.
- The Fund may at its discretion pay dividends (i) pay dividends out of the capital of the Fund, and/ or (ii) pay dividends out of gross income while charging all or part of the fees and expenses to the capital of the Fund, resulting in an increase in distributable income available for the payment of dividends by the Fund and therefore, the Fund may effectively pay dividends out of capital. This may result in an immediate reduction of the Fund’s net asset value per share, and it amounts to a return or withdrawal of part of an investor’s original investment or from any capital gains attributable to that original investment.
- Investors should not only base on this document alone to make investment decisions and should read the offering documents including the risk factors for further details.
4 minute read
Key takeaways:
- Overall investor sentiment towards listed real estate investment trusts (REITs) turned more favourable in 2024 but was tempered by the market’s concerns around geopolitical factors and rate expectations.
- Underlying real estate fundamentals are recovering, with higher transaction volumes and favourable supply-demand dynamics, supportive of value and income growth in the year ahead.
- An allocation to listed REITs enables investors to capitalise on the sector’s defensive income streams and new growth opportunities.
