REITs poised for takeoff in 2024

TORONTO, Jan. 10, 2024 /PRNewswire/ - According to Hazelview Investments' 2024 Global Public Real Estate Outlook Report (the "Report"), after two years of challenging conditions, share prices for global real estate investment trusts ("REITs") are poised to outperform in 2024, fueled by two key dynamics: resilient corporate earnings for REITs despite slower economic growth, and rapid declines in new real estate supply.

"The shifting tides of economic and monetary conditions, coupled with compelling valuations, create a canvas for strong performance in the REIT market in 2024," says Corrado Russo, Managing Partner & Head of Global Securities at Hazelview Investments. "Navigating this landscape with precision and seizing the opportunities it presents defines our approach. This is not just a moment—it's an extraordinary market opportunity, and we are poised to capitalize on it."

The Opportunity

When compared to the previous two years, the current economic and capital markets environment is much more favourable, specifically with respect to the trajectory on interest rates.

Recent economic indicators suggest a moderation in both inflation and economic growth. That moderation would give central bankers confidence that the tightening of financial conditions, along with the lag effect from higher interest rates and the reduction of central bank balance sheets, will slow inflation to levels that more closely resemble years preceding the pandemic.

Looking back at central banks' five waves of interest rate hikes since 1995, REITs were able to deliver the strongest returns in the wake of pauses to those campaigns. This is a key historical point that underlines the opportunity ahead for REITs as an asset class.

What Shifts the Value Paradigm?

Heading into 2023, Hazleview cited three catalysts that would help to close the valuation discount for REITs: slowing interest rate increases, corporate earnings surpassing expectations, and mergers and acquisitions providing a floor for evaluations. All three of those materialized in 2023.

Beyond a more favourable interest rate environment in 2024, two other key tailwinds could play a role in REIT evaluations for the coming year:

Resilient corporate earnings growth for REITs: Global REIT earnings are forecasted to rise by over 10% cumulatively in 2024 and 2025 — a projection that factors in increases to property taxes, to payroll costs, and to interest expenses. Parallel supporting items include annual contractual rent increases, affirmative re-leasing spreads at expiration, and decreased vacancies.

Rapid declines in new supply: Supply is forecasted to decline in 2024 and 2025. A consequence of the rise in inflation over the past 18 months has been a significant increase in construction and financing costs over the last 12 months, from interest rates staying higher for longer. Sustained demand for residential and commercial real estate, fueled by a resilient global economy and coupled with the forecasted drop in supply growth, would drive REIT values higher. In short: reduced construction will further highlight the imbalance between supply and demand, in key regions and property types.

"Despite a rally at the ending of 2023, REITs remain cheap," said Samuel Sahn, Managing Partner & Portfolio Manager, Public Real Estate Investments. "Over the coming year, we believe REITs that can deliver attractive earnings growth, retain pricing power in a slowing economic climate, grow margins, and trade at an appealing valuation with a higher-than-average expected return will outperform."

How Can Investors Capitalize on this Opportunity?

Today, REITs are comparatively cheap — relative to public equities, to private real estate, to historical valuations, and to the valuations for the coming two years projected by Hazleview's modeling.

Hazelview Investments' valuation models suggest REITs are priced at a high-double-digit discount to intrinsic value (defined as a blend between NAV and Discounted Cash Flow), which implies ~22% upside in price from today.

"Through active management, we can strategically position our portfolios in specific companies, property types, and geographies with better upside and higher return potential to take advantage of the opportunities currently in the market," says Claudia Reich Floyd, Managing Partner & Portfolio Manager, Public Real Estate Investments.

Hazelview Investments has been an active investor, owner, and manager of global real estate investments since 1999 and remains committed to creating value for people and places. The company employs a global investment and asset management team of more than 80 people in its offices in Toronto, New York, Hong Kong, and Hamburg and manages 12.1 billion (CAD) in real estate assets. To learn more visit hazelview.com.

SOURCE Hazelview Investments Inc.