Multiple tailwinds underpinning residential real estate

In 2024, the US economy surpassed expectations with the addition of approximately two million jobs. This positive trend was even more pronounced among the highly educated and higher-income population, a primary demographic for apartment real estate investment trusts (REITs). Coupled with solid wage growth of over 4%, and lower inflation, consumer confidence has improved, translating into a pickup in rental demand for apartments.

Locations such as Seattle and San Francisco, which had languished post-pandemic, are now witnessing a recovery, supported by recent local elections where politicians have focused on re-establishing the vibrancy of central business districts. In addition, return to work mandates by major tech employers such as Amazon, Microsoft, and Salesforce have bolstered leasing trends in these markets, granting many landlords enhanced pricing power as relative rental affordability has become more attractive.

Another trend is the (overdue?) ‘unbundling’ of younger adults from their parental homes. With home ownership unattainable for many in this cohort given over 6.0% mortgage rates,¹ homeownership rates have continued to decline, further amplifying rental demand and reflected occupancy levels exceeding 95% in recent quarters,² a level typically associated with market rental growth.

The headwind for US landlords in recent years has been the high levels of new inventory hitting markets. A consequence of the record construction spree triggered by low borrowing costs and buoyant demand in 2021 and 2022, notably in Sunbelt cities like Nashville, Austin, and Charlotte. Rent growth here is weak, and at times has been negative. However, with construction starts trending down, expectations are for an inflection point in these markets next year, setting the stage for a resumption of growth across the apartments sector.

The residential opportunity

Structurally undersupplied across different sub-sectors

 Source: ¹UCAS, ²OECD, ^3,4Green Street Advisors, ⁵Jefferies, FRED, NAR, REIS, Redfin, Janus Henderson Investors analysis, as at 31 December 2022. There is no guarantee that past trends will continue, or forecasts will be realised. The views are subject to change without notice.

The headwind for US landlords in recent years has been the high levels of new inventory hitting markets. A consequence of the record construction spree triggered by low borrowing costs and buoyant demand in 2021 and 2022, notably in Sunbelt cities like Nashville, Austin, and Charlotte. Rent growth here is weak, and at times has been negative. However, with construction starts trending down, expectations are for an inflection point in these markets next year, setting the stage for a resumption of growth across the apartments sector.

Senior housing: boomers leading the pack

Senior housing landlords have been amongst the best performers in the REIT market in recent years. Market leader Welltower generated almost 150% shareholder return since the start of 2023,³ far outperforming even the en vogue data centre landlords! Demand is experiencing remarkable growth, driven by the anticipated 5% annual increase in the 80+ demographic through 2030.⁴ With occupancy rates and rental growth on the rise, senior housing REITs are leveraging operational efficiencies and data insights to offer superior services to residents and improved margins to shareholders. The pandemic spurred a retreat of private capital from this asset class, which has allowed listed REITs like Welltower and Ventas to acquire, at scale, properties at attractive yields in the 7-8% range, enabling a powerful blend of internal and external growth.

Student accommodation – supply constrained with resilient demand

At the other end of the demographic spectrum, student housing continues to see demand for purpose-built accommodation far outstrip available supply, which has enabled some landlords to consistently see rental growth rates ahead of inflation. In the current academic year, UK-focused REIT Unite reported rental growth of more than 8% from the prior year.⁵ With a shrinking supply of private rental housing, constraints on new development and recession resilient demand, we expect the sector to continue to deliver.

Living sector offers defensive growth at a discount today

As we look ahead, the residential sector, supported by traditional apartment landlords alongside alternative sub-sectors, presents a compelling investment case as supply pressures ease. With needs-based demand and demographic tailwinds, growing income streams are far more predictable than in many other traditional real estate sectors.

US residential REITs are currently trading at a double-digit discount to NAV and multiples have de-rated from their historical premiums.⁶ This is despite the fact that balance sheets are stronger than ever, and operating platforms are driving strong efficiencies and growth potential. As a result, we believe residential REITs look well positioned for a multi-year run of earnings and dividend per share growth and the potential for a re-rating, as evidence of the next cycle surfaces through accelerating rent growth.

¹ MortgageNewsDaily.com; typical 30-year mortgage term, as at 28 February 2025.

² occupancy levels over 95%

³ Financecharts.com, Welltower REIT 30 December 2022 to 28 February 2025. Past performance does not predict future returns.

⁴ Organisation for Economic Co-operation and Development, 2025-2030 estimates.

⁵ Unite Group.com as at 25 February 2025; financial results 2024.

⁶ SNL Real Estate as at 31 January 2025. Past performance does not predict future returns.

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.