REITs ‘on cusp of golden era’ in 2025: Analyst

Beset by recent challenges and a mercurial investor market, real estate investment trusts (REITs) appear to be on the cusp of its “next golden era of investment”, says a leading industry analyst, as the key conditions for a REITs boom emerge.

Matthew Sgrizzi, chief investment officer (CIO) and portfolio manager at leading global REITs investor LaSalle Investment Management Securities, sees current conditions in the real estate market and broader economy resembling the precursors to historical golden eras for the asset class, auguring a significant uplift in REITs investments next year.

“Periods of underperformance [of REITs relative to equities] have historically tended to reverse and this instance is no different with the performance gap already narrowing,” Sgrizzi said.

Global REITs have performed relatively well over the preceding 12 months, driven by surging demand for healthcare, office and data centre space as well as a falling interest rate in the US; however, this has come off the back several years of negative performance, including a 20% fall in total returns in 2022.

The average total return for REITs over the past 25 years is eight to nine per cent per annum. According to Sgrizzi, over the next three years, the market will return to these historical averages, with around four percentage points to come from income.

Four conditions for REITs revival met

Sgrizzi and his team identified, and are currently evidencing, four factors that typically precede a REITs market surge:

1. a dislocation of bank lending to real estate;
2. broad-based negative sentiment around real estate;
3. underperformance versus broader equities; and
4. an easing or reset of financial conditions.

“Many of the factors supporting the REIT market’s upbeat prospects are also positives for real estate as a whole,” Sgrizzi said.

“For example, an easing in financial conditions has historically been a driver of strong forward REIT returns, as well as those for private equity real estate.”

A significant undersupply in credit – currently rated by the US Senior Loan Officer Survey as the widest undersupply in a decade, with the exception of the depths of Covid – presents an opportunity for REITs growth, given their already strong financial positions, Sgrizzi said.

“Global REITs entered the recent tightening cycle with their lowest leverage levels on record, and nearly 90 per cent of their debt on fixed rates and an average remaining term of seven years,” he said.

Additionally, he said, a global monetary easing cycle is now well underway, which historically bodes well for REITs.

“Real estate is a capital-intensive business that is sensitive to changes in financial conditions, an observation that holds true for both directions of interest rate change. The downside of this was evident in 2022 and 2023, but the upside is likely coming into play.

“A global monetary easing cycle is now underway, with several central banks cutting rates. Historically, REITs perform well in periods leading up to and following a central bank easing cycle.”