Another good year for the global market of listed REITs is expected for 2022, with annualised returns of 12% to 15%, according to the latest 2022 Global Public Real Estate Outlook Report published by globally active investment manager Hazelview Investments.
According to Claudia Reich Floyd, portfolio manager and head of Hazelview's Germany office, "The potential for rent increases in most real estate markets is higher than it has been for over a decade. REITs are therefore in a position to pass on inflationary cost increases, leading to an increase in yields. We expect yield growth to be the key performance driver in 2022."
Hazelview's top five real estate prospects for next year include: Logistics space in North America, residential in the US, European office REITs, data centres in Japan and Singapore, and mobile towers around the world, which should all benefit from rising market rents.
At its headquarters in Toronto, Corrado Russo, Hazelview’ senior managing director, was bullish on next year's prospects. “Looking at our valuation models for the global REIT sector, current pricing suggests a 19% upside potential on a weighted average basis to our forward-looking intrinsic value. This equates to an annualized total return of 12% to 15% when combined with current dividends and assuming a two-year window to approach intrinsic value,” he said.
REITs are trading at a discount when compared with global equities historically, he said, but, for 2022, inflation trends will also play a role in how well the sector does and which REITs are most attractive.
“We believe the potential of sustained inflation will act as a tailwind for real estate valuations and coupled with strengthening fundamentals this will drive attractive earnings growth,” says the report.
Properties with both short- and long-term leases may benefit in an inflationary environment, it said. ‘Expectations for higher inflation may “improve the negotiating power of landlords” and result in higher rents for properties with short-term leases, while properties with long-term leases can be used as inflation hedges.'
Looking at the possible risks ahead, the report highlights possible 'banana skins' in the area of monetary policy.
“Should central banks become more aggressive fighting inflation (significantly tightening monetary policy), this could create a headwind for equities (REITs included),” it said. Yet if rate hikes around the globe are slow and if there’s “healthy economic growth,” then real estate investors are likely to see “top line revenue growth outpacing higher debt costs that typically come with rising rates.”
