More Lights Are Turning Green for Listed Real Estate in 2025

19 December 2024
Flora Street Arncliffe

Comments from Guy Barnard, Co-Head of Global Property Equities at Janus Henderson Investors

We came into 2024 expecting an inflection point in the commercial real estate sector following two years of declines in the face of rising interest rates. This thesis seems to be playing out.

Albeit it’s been a year of ‘stop and start’, with geopolitical concerns and the markets’ expectations around rates oscillating, driving short-term sentiment toward listed real estate investment trusts (REITs).

One property CEO recently commented to us, “a lot of lights are now turning green”.

Looking ahead, there are three key messages that continue to give us cause for optimism into 2025:

  1. We believe we have seen the bottom in most real estate property types and geographies – and are at the beginning of a new commercial real estate (CRE) cycle.

    Valuations have largely been reset and transaction volumes are increasing, with a greater breadth and depth of demand across investment markets.

    Higher transaction volumes should result in a firming and eventual increase of asset values. While rising interest rates necessitated the downward reset in real estate valuations, they also have made construction financing prohibitively expensive in most jurisdictions.

    Inflation has increased the cost of raw materials and labour required to build. As a result, many property types have seen new development starts grind to a halt, which means supply growth is likely to broadly decelerate for the next few years.

    Less oncoming supply and steady or growing demand is a recipe for increasing landlord pricing power in the years ahead.

  2. We continue to expect listed REITs to lead the recovery in commercial real estate.

    Companies from property sectors that have benefited from structural trends, employed lower leverage (debt), and enjoyed an advantage in terms of cost and access to capital, with a pathway for growth have seen share price appreciation from the market.

    For example, Goodman Group in Australia has leaned into data centres as a pathway for further growth, with a pipeline in excess of 2.5GW.

  3. Listed REITs have continued to provide defensive and growing cash flows and dividends.

    The underlying operational fundamentals of many businesses remain robust, with occupancy high and rents rising. These factors can enable further cash flow and dividend growth in the year ahead.

    While the defensive nature of this cash flow has perhaps been a little unexciting in an equity bull market like 2024, it is worth remembering the significant outperformance of listed REITs in northern spring/summer as the market became concerned about employment and economic growth prospects.

    In a year of broad-based positive returns and enthusiasm, having an allocation to an asset class that offers some diversification in the ‘What if?’ scenario we think, remains valuable.

These points lead us to think that real estate ‘works’ again from today’s valuations because listed REITs have been repriced for the current interest rate environment.

High and growing dividend yields, defensive income streams and diversification versus the wider equity market, all support an allocation within a balanced portfolio.

Underlying real estate fundamentals remain steady; coupled with new growth opportunities ahead for the listed REIT sector, we believe the asset class can continue to outperform other forms of property ownership. Share valuations have rarely ever been more discounted relative to broader equities, while interest rates have turned from a headwind into something looking more supportive.

We may not yet be “off to the races” in the listed REIT sector, but more lights are turning green.