LaSalle Investment Management Securities remains optimistic about REITs, suggesting they could be on the verge of a “new golden era”.
The manager highlighted a recurring pattern linked to improved performance, which includes four key elements: a dislocation in bank lending to real estate, widespread negative sentiment towards the sector, underperformance compared to broader equities, and easing financial conditions.
“The current environment resembles the set-up for these historical golden eras, suggesting REITs may be on the cusp of its next golden era of investment,” LaSalle Investment Management Securities’ chief investment officer and portfolio manager Matthew Sgrizzi said, noting that many of these factors supporting the REIT market are also positive for real estate as a whole.
In particular, he emphasised a significant retrenchment in bank lending to real estate over the past few years where the net balance between demand for loans and banks’ willingness to lend showed the widest undersupply of credit in the past 10 years, excluding the pandemic years.
In October, the Australian Securities and Investments Commission confirmed the ongoing shift of capital from public to private markets, highlighting the growth of private finance in Australia. The Reserve Bank of Australia valued the domestic private credit market at around $40 billion.
Over the past 25 years, REITs have produced total returns of between 8 to 9 per cent per annum and Sgrizzi’s base case projection for the next three years aligns with these historical averages, with approximately 4 percentage points of that coming from income.
“If financial conditions were to ease further, these return expectations could increase to the mid- to high teens range per annum, which aligns with previous ‘golden era’ REIT performance,” he said.
Regarding REIT’s underperformance relative to broader equities, LaSalle’s portfolio manager pointed out that REIT underperformance typically reaches peak historical levels before reversal, and the current scenario is “no different”, given the performance gap is already narrowing.
Moreover, Sgrizzi noted that real estate is a capital-intensive business, highly sensitive to financial conditions and interest rate changes.
While 2022 and 2023 saw challenges due to tightening conditions, the upside is expected to materialise in 2025, the firm said.
“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,” Sgrizzi said.
Separately, Fitch Ratings, which currently holds a “neutral” outlook for US equity REITs in 2025, highlighted that a “relatively more stable interest rate environment” is fostering a more receptive environment for transactions activity for commercial real estate.
The credit agency also noted it expects this trend would continue into the next year, noting that the outcome of the elections led to some more optimistic forecasts for the sector, driven by the potential for less regulation and friendlier business environment.
However, some forecasts also caution against risks such as increased tariffs and the impact on climate.
In Australia, the S&P/ASX 200 REITs index has climbed more than 40 percent since October 2023.
According to property consultancy Savills, the index regained all losses incurred since the rate tightening cycle commenced in 2022.
Looking ahead, Savills forecast a “promising” outlook for 2025 for capital markets, driven by recovering economic growth and improving sentiment.
The firm noted that REITs share prices signal a recovery in the property market.
According to Savills, commercial property markets are reaching a cyclical bottom, with declines in capital values easing across major sectors.
Moreover, office capital values fell by 1.6 per cent in Q3 2024, but the industrial, retail and hotel sectors recorded “only slight declines”.
“The stabilisation of asset values is expected to drive a recovery in investment markets, with a return to capital growth anticipated in 2025,” the consultancy said.
