Real estate securities have been recovering from earlier price adjustments, but new risks from U.S. trade policy and uncertainty around Fed rate cuts have impacted growth. While the U.S. economy remains strong, concerns over tariffs and global growth have tempered REIT performance and slowed share price gains.

Despite the challenges, demand for real estate remains robust across most sectors. Meanwhile, construction has slowed significantly over the past two years due to higher interest rates and rising costs, compounded recently by new tariffs and stricter immigration policies. This reduced supply could extend the current real estate cycle.

REIT GROWTH DRIVERS

Resilient income: REITs historically performed well in trade-war or tariff-driven environments due to their domestic demand focus, defensive nature, and long-term leases which provide a natural inflation hedge.

Solid fundamentals: Limited new construction is creating a supply-demand imbalance, supporting property values and rents.

Structural growth trends: Housing shortages are fueling rental growth in residential areas like apartments and senior housing, while digitalisation trends like e-commerce and AI are driving demand for logistics (industrial properties, cold storage facilities, etc.) and data centres.

Strong mean reversion potential: REITs have historically outperformed equities when the 10-year Treasury yield was between 3% and 5.25%. With interest rates expected to remain rangebound for longer, REITs are positioned for a potential rebound, especially as they trade at historic discounts relative to equities.

Increased M&A potential: Attractive valuations and improving fundamentals could drive private equity interest in the REIT market. Lower rates, even if delayed, would support acquisitions.

REITS OUTPACE STOCKS IN MODERATE INTEREST RATE ENVIRONMENTS

^{Sources: FRED, Morningstar Direct. Average returns using data from 1/1/1972 to 31/12/2024. REITs represented by FTSE NAREIT All Equity REIT Index and stocks represented by S&P 500 Index. Past performance does not guarantee future results.}

REGIONAL OPPORTUNITIES

U.S.: Fundamentals continue to improve, with projected earnings growth over 6% in 2025 and 2026. Sectors such as senior housing, apartments, and cold storage show strong defensive demand and limited supply.

Europe: European real estate remains undervalued after underperforming in 2024 due to slow growth, political risks, and high leverage. However, there are promising opportunities in growth sectors including logistics, data centres, multifamily housing, and self-storage.

Asia: Lower bond yields and slower growth present favourable conditions for REITs. Key opportunities include Japan’s hospitality, Australia’s residential and retail, Singapore’s industrial and data centres, and Hong Kong’s non-discretionary retail.

POISED FOR GOLDILOCKS CONDITIONS

After two volatile years, steadier macro conditions and a lower cost of capital offer a brighter outlook for REITs. Strong fundamentals and long-term drivers in select sectors and regions make this an attractive entry point for patient, long-term investors.