REITs 2019 Outlook: Ready to Outperform

A Timbercreek report identifies five factors favoring REITs this year, including an expected increase in allocations to real estate and resilient earnings growth.
Samuel Sahn
Samuel Sahn, Portfolio Management & Research Executive Director, Timbercreek

Timbercreek has released its 2019 global real estate securities outlook report and revealed that global REITs are projected to deliver strong returns in the year ahead.

“We believe the main takeaway from the report is that global REITs, as an asset class, are set up well to outperform most other sectors in 2019 and deliver an attractive 9 percent to 10 percent total return balanced between yield and growth, not just growth,” Samuel Sahn, Timbercreek’s portfolio management & research executive director, told Commercial Property Executive. “We think global REIT earnings growth will prove resilient in 2019 and increased allocations to the asset class will support valuations.”

Overall, the report projects attractive performance across many markets including Canada, the U.S. and Europe. The stage is set for REITs to outperform broad equities. The report shows that REITs and their more predictable recurring income streams have proven to be a powerful solution. According to Sahn, there are some telling signs in the global market that anticipate what securities will do in the year ahead.

“We believe the cumulative impact from tariffs, slower growth in China, tighter monetary policy in the U.S. and Canada, as well as reduced monetary policy easing globally is slowing the trajectory of economic growth,” he said. “That said, we do not believe a recession is imminent. REITs have proven to be a powerful place to be in slowing GDP environments because of their recurring income streams.”

Timbercreek sees five factors favoring REITs in 2019, including REIT outperformance typically grows in magnitude and frequency as economic growth slows, global REIT earnings growth will be more resilient than global equities during the year, setting the stage for better relative performance. Additionally, institutions are expected to grow allocations to real estate this year, which when combined with large unfunded commitments will be supportive of real estate valuations, while public market valuations are attractive relative to private market valuations.

“Global REIT valuations are attractive relative to global equities,” Sahn said. “Public market valuations are attractive to private market valuations trading at an 11 percent discount to NAV.  Institutions are also expected to increase allocations to real estate in 2019, which when combined with large unfunded commitments will be supportive of real estate valuations.”

A world view

The report argues that, in Canada, industrial REITs will benefit from e-commerce growing to represent a greater percentage of total retail sales in the years ahead. This is especially true for the country’s senior housing sector, where Timbercreek expects strong demographics creating outsized demand growth in this sector.

In the U.S., the report thinks the convergence of real estate and technology will create a strong secular growth story for data centers, representing one of the best investment opportunities in 2019.

Over in Asia, Timbercreek views small- to medium-sized Grade B office buildings in Tokyo as positioned well to see further rental growth driven by a record-low unemployment rate, steady economic growth and strong property fundamentals. In Hong Kong, the report favors companies that own office buildings in decentralized areas of the country, while in Singapore, it believes data centers offer an attractive opportunity to earn outsized returns with secular growth characteristics.

In Europe, the report predicts that Brexit will most likely enhance the appeal and demand for office markets in places like Belgium and the Netherlands, while multifamily residential markets in Germany and Ireland offer a compelling opportunity to earn outsized returns.

Carter Phillips, an analyst in the real estate client operations department of S&P Global Market Intelligence, noted that as of Nov. 30, publicly traded U.S. Equity REITs had a one-year average dividend yield of 4.1 percent

Image courtesy of Timbercreek