Double-digit profits: how REITs could solve the “yield problem”

Investment manager Timbercreek expects that 2020 will see double-digit yields for REITs. Low interest rates and the lack of alternative investment opportunities will mean that real estate investors can scarcely put a foot wrong with REITs over the coming year and that stock exchange-listed real estate stocks from around the world can look forward to a rosy future. 

The head of the German office based in Hamburg and global REIT portfolio strategy manager Claudia Reich Floyd says that REITs will solve the “yield problem” over the longer term and expects that this year will see profits in the order of 10% to 12%.

In its survey “Global Real Estate Secu­ri­ties 2020 - Market Outlook” the Toronto-based property company writes that the world’s top investments this year will include logistics properties and high-specification shopping centres located in continental Europe. The German office market is an especially attractive destination amongst property investors in 2020, particularly the Top 5 cities Berlin, Frank­furt, Munich, Hamburg and Stutt­gart. These have been experiencing continual rental price growth and low levels of vacancy.

According to the annual survey, global real estate stocks (real estate invest­ment trusts -REITs) are likely to achieve yields of 10% to 12% in 2020. This includes a cash return of 4.0% to 4.5% and a mode­rate growth estimate of 5%, explains Reich Floyd. 

Timbercreek still sees room for price hikes: “Out­per­for­mance by REITs typically increases in a slightly improving economy and the income growth potential for 2020 appears attractive on an absolute basis and relatively robust”, says Reich Floyd. In addition, the rela­tive valuations appear to offer continued room for price increases. Property valuations will be supported by funds not yet invested but allocated for investment in real estate.

Looking back, Timbercreek says that global REITs have achieved an annualised total yield of 9.2%, which is a dynamic performance - up there with glo­bal stocks (10.1%) - and is well above the yield for global bond issues (2.4%). Reich Floyd points out that REITs are also relatively resilient “in the event of further problems with the global economy”.

In terms of the development of property markets worldwide, Tim­ber­creek sees opportunities in US residential construction and indus­trial REITs, which are currently benefiting from the growth in e-com­merce, self-storage in Aus­tra­lia and the increased demand for accommodation in Japan because of the Olym­pic Games to be held in Tokyo this summer.

In continental Europe, Tim­ber­creek views the logis­tics ­sector particularly positively in 2020 as the increasing demand for indus­trial space driven by the growth in e-com­merce is likely to result in rental price increases and value creation opportunities, from which REITs could benefit. The survey shows that there is appealing yield potential in European countries such as Belgium, the Netherlands and Luxembourg, but not in the UK where landlords have been reducing the rents for retailers faster than expected in order to counteract the increasing numbers of bankruptcies.