Actively Investing Through Paradigm Shifts
PGIM asset managers highlight key trends and related opportunities that they believe warrant the most investor attention as 2025 gets underway.
SUPPORTIVE TRENDS ACCELERATE REIT REBOUND
Dec 12, 2024
The real estate market is gaining tailwinds for a sustained rebound as improving macro conditions and fundamentals create a good entry point for investors.
After a rocky start, global REITs showed renewed signs of life in the third quarter when the Federal Reserve initiated its easing cycle. REITs rallied as the equity market’s focus expanded beyond large-cap technology stocks with growing support for a continued rebound in 2025.
TAILWINDS FOR A SUSTAINED REBOUND
- Better macro conditions: Moderating rates with a lower cost of capital and subdued inflation form the foundation of a supportive backdrop heading into 2025.
- Improving fundamentals: Limited new construction contributes to a supply-and- demand imbalance that is likely to keep underlying property fundamentals solid for several years.
- Mean reversion potential: Valuations appear attractive at the outset of 2025. In an equity environment marked by extended valuations among market-leading stocks. REITs represent relative bargains versus broad market averages, positioning them to benefit from mean reversion.
- Acceleration in M&A and IPO activity: Large-scale privatization was a major REIT market theme in 2024. Reduced cost of capital enabled many REITs to pursue acquisitions more aggressively, opening new avenues for earnings growth in 2025. A lower-rate environment is expected to attract more private-equity interest in the REIT category, leading to more deals if market conditions continue to cooperate.
REITS TRADING AT DISCOUNT VERSUS EQUITIES
Source: Bloomberg, MSCI, Standard & Poor’s. Analysis as of 10/31/2024 for the MSCI US REIT Index and S&P 500 Index.
FOCUS ON DEFENSIVE GROWTH AREAS
Barring a major economic contraction, we expect REIT fundamentals to remain steady for most property types, given long lease durations, low supply risk, and defensive and secular-based demand. A mild economic contraction could serve as a positive REIT catalyst as rates retrace and valuations benefit from the category’s defensive nature.
- Data centres: AI proliferation is driving immense demand for data centers in a supply-constrained market, contributing to low vacancy rates and higher rent growth.
- Health care: The sector generated most of its growth from external acquisitions in the past 12 months—an area we expect to become very active going forward.
- Storage: We like cold storage given attractive valuation support, defensive demand base (food consumption) and improving operating efficiencies. We’re cautiously optimistic on self-storage, which has started to recover and could benefit from increasing housing sales as mortgage rates decline.
RICK ROMANO. CFA
Head of Global Real Estate Securities
PGIM Real Estate
After a volatile couple of years, we’re optimistic about steadier macro conditions underpinned by a lower cost of capital. Given the strong fundamentals and compelling long-term drivers in certain REIT sectors and regions, we think now is a good entry point for patient long-term investors.
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The Right Time for REITs
PGIM Real Estate explores how rate cuts create a tailwind for REITs in PGIM Investments' latest Manager Minutes video.
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