REITs on the Recovery Path
May 14, 2024
PGIM Real Estate shares insights on the improving global real estate outlook and where it sees compelling opportunities with strong fundamentals and defensive demand.
STRONG REIT FUNDAMENTALS AND FAVOURABLE SUPPLY-DEMAND TRENDS
After strong performance in 4Q23, renewed concerns over the pace of interest rate cuts created headwinds for the REIT market. While inflation has begun to decelerate, it remained sticky for certain areas within the economy, such as the rental market. In spite of the interest rate overhang, we continue to see strong fundamentals and favourable supply-demand dynamics in U.S. REITs. In Europe, the new phase of the rate cycle with rates peaking and potentially dropping in 2024 is expected to help position the real estate market well for recovery. In Asia Pacific, we see attractive opportunities across real estate sectors that can weather the volatility and substantial growth and valuation upside in data centers.
FOCUS ON DEFENSIVE DEMAND SECTORS
We believe that property companies that can use their cost-of-capital advantage to generate external accretive growth are the best opportunities. Defensive demand sectors, such as senior housing and assisted living where occupancy levels remain significantly below pre-COVID levels, and special situations in select M&A takeover targets are key areas with strong growth potential. Self-storage and apartments should cycle through decelerating fundamentals in the second half of the year, creating limited supply and accelerating revenue growth potential over the next two years.
Rick Romano, CFA
Head of Global Real Estate Securities, PGIM Real Estate
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