REITs on track for ‘golden year’ in 2025

Anticipated strong demand and short supply for commercial property, most notably for data centres and healthcare, could spur a ‘golden age’ for real estate investment trusts (REITs) this year, with baseline returns “in the high single digits”, a leading analyst predicts.

Matthew Sgrizzi, chief investment officer and portfolio manager at LaSalle, sees REITs in a strong position for outperformance in 2025, given “strong financial positions, access to capital markets and increasing investor confidence”. These conditions appear to mirror other periods leading to a REITs growth spurt.

“The convergence of a number of factors, including a period of dislocation in bank lending, negative market sentiment, REIT underperformance, and the potential for an easing of financial conditions, mirrors the circumstances that have preceded previous periods of exceptional growth in the REIT market,” he said.

For Sgrizzi, current real estate fundamentals are broadly healthy, with particular strength in data centre- and healthcare-related REITs.

LaSalle sees low supply in the core REITs sectors – in office space, retail industrial and residential – being a tailwind for growth, with longstanding concerns over the office sector finally beginning to fade.

“That low supply should support the outlook for many real estate sectors around the world this year,” he said.

High-quality offices are in high demand and short supply in many markets around the world, Sgrizzi said, noting also an increase in office space rents in certain locations.

LaSalle predicts REITs are on track for baseline total returns “in the high single digits per annum over the next three years”, with around half of that return from income, matching average returns over the past 25 years of 8% per annum.

Should financial conditions ease further, with interest rates – and thus borrowing costs – falling further, those return expectations could be higher – with a 50 or 100 basis point cut potentially increasing returns to mid- to high-double digits.

Such a scenario would “[set] the stage for the next ‘golden era’ in REITs,” Sgrizzi said.

With equities “overhyped”, Sgrizzi believes that now is the time for investors to add real estate back to their portfolios.

Hot property

Data centres and healthcare REITs are ripe for further growth, while Europe and the UK are favoured given subdued prices.

“Today’s REIT sector is so broad and diverse. We are seeing some great opportunities in sectors that took a big hit in the fourth quarter, particularly interest rate-sensitive sectors that have higher longer-term growth potential or are more yield-orientated, such as cell towers, and those sectors could do quite well this year, given they have been sold down,” he said.

“We see the same thing with REITs in Europe and the UK, which have taken a hit in the last couple of months with higher interest rates and in reaction to US policy changes; UK REITs are about as cheap compared to US REITS as the group has ever been and there is also less upside pressure on interest rates in Europe compared to the US.”