Monetary policy, global trade politics, lagging private market valuations, and myriad other factors continue to drive uncertainty within the global equity market. However, we believe bright spots appear amid the murkiness across many areas in global REITs. In our 2025 Global REIT Outlook, we highlight sectors we believe will provide compelling investment opportunities in the year ahead across the U.S., Europe, and Asia Pacific markets.

U.S.

Our market outlook provides the macroeconomic backdrop we believe will define the coming year – continued inflationary pressure and meaningful uncertainties driven by unknown geopolitical, fiscal, and monetary policy implications. As such, we anticipate continued volatility across public markets as investors digest new information as it comes to light. We maintain conviction in a structurally higher long end of the yield curve, and we believe the market is slowly accepting that we have moved into a new era of debt costs that will remain above levels that became the norm after the Global Financial Crisis. This broader acceptance is likely to facilitate the survival of the fittest – business decisions and capital structures implemented during periods of irrational exuberance and free capital will fail to survive, creating opportunities for disciplined investors to find attractive external growth opportunities.

In the context of the broader equity market, we remain optimistic about the relative opportunity driven by valuations that screen more rational across REITs, where cash flow multiples are just slightly above the historical average over the last 20 years, while the S&P 500’s multiple going into the year was 1.66 standard deviations above the historical average over the same time. Consequently, REITs screen meaningfully more attractive versus the broader equity market on a relative basis, with the relative multiple for REITs versus the S&P 500 at 1.25 standard deviations below the historical average (Figure 1). Furthermore, the market’s acceptance of the reality of higher for longer long-term debt costs is likely to serve as a greater headwind for the broader equity market that has been driven by high-growth, technology-oriented companies as future earnings get discounted at a structurally higher rate than the last decade.

REITs also screen attractive versus the private real estate market – not only as it relates to valuations but also in this battle for the survival of the fittest. From a valuation perspective, the REIT market has already repriced for the elevated debt costs while the private market continues to lag (Figure 2). As a result, we anticipate further pressure on valuations in the private real estate market versus the listed real estate market. As we think about the survival of the fittest in the real estate sector and the unwinding of the upcoming wall of debt maturities, we anticipate REITs to deploy their lowly-levered balance sheets and relatively attractive cost of capital (and availability of capital) versus the private market to accretively acquire high-quality assets.

As we manage exposures across the portfolio given the general uncertainty and volatility in the market, we remain focused on capturing real estate fundamentals we can control at rational valuations, leading us to be constructive about the senior housing and office sectors looking ahead over the coming year.

Office

Since the onset of the COVID-19 pandemic, sentiment toward the office sector has significantly deteriorated as the value proposition of office space came into question. Today, more and more companies make headlines for issuing four- or five-day return to office requirements. While office tenants continue to rationalize their space needs to meet their evolving work environments, new demand is finally balancing the downsizing and fundamentals are beginning to show signs of improvement. Additionally, new supply for office remains at historical lows with as little as 500,000 square feet breaking ground in the last quarter of 2024. New deliveries are expected to decline by 20% in 2025, and an additional 75% each year through 2027 based on the current development pipeline (JLL, as of January 7, 2025). Concurrent to declining new supply, the rate at which office inventory is demolished or converted has increased more than 20% each year since pre-COVID levels. Together, these dynamics resulted in office leasing nearing pre-pandemic levels for the last quarter of 2024, and demand strengthening enough to mark the first quarter of positive net absorption since 2021, and just the second time since the pandemic began (Figure 4).

While the headline numbers are promising, it is important to note there remains a meaningful bifurcation between the “haves” and “have nots” within office, with newer and higher quality space continuing to win while lower-quality space increasingly becomes obsolete. In this bifurcation, the REITs are well-positioned as their portfolios represent the top tier of office product in major markets. Additionally, the property type remains under pressure from a capital markets perspective as the need for debt refinancings is occurring in tandem with higher interest rates and lower valuations compared to when the debt was initially placed. As owners struggle to reconstitute their capital stacks, the REITs, with their relative balance sheet strength and competitive cost of capital, will have the ability to creatively deploy capital to acquire high-quality assets and drive accretive growth. While the sector was among the best performers across REITs last year, it has underperformed the U.S. REIT market by nearly 70% since pre-COVID levels, with meaningful room for recovery for the best portfolios as fundamentals continue to improve from trough levels over the last five years.

Europe

The broad macro backdrop for U.K. and Europe should see modest GDP growth in most countries. Of the major economies, we expect the best growth to come from Spain and the worst from Germany with export-driven economies most negatively impacted by potential Trump tariffs. While the uncertain growth environment could present a risk for stagflation, this is not our base case for the coming year. Further, political risks remain top of mind across Europe again in 2025. France faces the risk associated with a barely functioning government in place until new elections can be called in June. If further spending cuts cannot be implemented, the country could receive another credit rating downgrade. Elsewhere in Germany, following a vote of no confidence, there will be elections in the first quarter of 2025, though the risk from a populist government being elected remains low. The U.K. will also face further budget uncertainties, but any significant decline in growth expectations would likely lead to more aggressive interest rate cuts.

From a monetary policy perspective, we expect further policy rate cuts across the region (Figure 5), including a continuation of the cuts from the European Central Bank, which began in June 2024, and the Bank of England, which began in September 2024. Medium-term inflation expectations have decreased more in Sweden and the Eurozone than the U.K., driving our conviction for more policy rate cuts in Europe than the U.K. However, while credit spreads and swap rates have seen sizeable compression since the onset of rate cuts, they have recently started to rise and are likely to remain volatile. All in, it remains unlikely that near-term funding costs decline significantly, regardless of the trajectory of Central Bank interest rate expectations.

In this context, we are focused on the impact of interest rates on property valuations, balance sheet strength, and equity valuations in relation to our outlook for the REIT sector in this region. As it relates to the impact of interest rates on property yields, the decline in valuations is already behind us, which could lead to modest yield compression going forward. This is particularly the case in the U.K. in sectors such as shopping centers and student accommodation. However, we still see the biggest risks for continued value degradation across the office sector in the U.K. and Continental Europe. From a balance sheet perspective, with a few exceptions, leverage levels are now more manageable in Europe given the aforementioned valuation corrections. Further, we expect opportunistic equity raises in the coming year, rather than companies being forced to issue equity defensively. Lastly on equity valuations, multiples do not screen as expensive going into 2025, but we expect low single digit earnings growth in both the U.K. and Europe as higher financing costs still have a negative impact versus in-place debt, despite interest rate cuts. As such, we do not anticipate multiple expansion. In this environment, we prefer the lower leverage of the U.K. versus Europe and see higher relative growth opportunities such as the German residential and U.K. student accommodation sectors.

U.K. Student Accomodation

Despite the sector’s underperformance in 2024, both the occupier and investment markets for student accommodation remain strong. The population of 18-year-old students in the U.K. is set to increase over 10% in the next five years, and application rates continue to improve, particularly for the higher quality universities where the sector has the largest exposure. International applications have increasingly been driven from outside the EU, and concerns over visa restrictions for families of students have had no impact on the student accommodation REITs’ core market. Supply for the sector remains tight versus history as small landlords continue to exit the sector due to the increased taxation burden that does not affect the REITs (Figure 7). These units offer affordability versus alternative choices, especially when including other amenities provided and all utility costs. As such, while rent growth has been slowing, we expect growth in the medium-term to be above inflation in the mid-single digits. Leverage remains under control for the sector and recent equity raises provide the capital to fund value-accretive developments in the coming year.

Asia Pacific

The two Asian markets to watch in 2025 will be China and Japan for widely different reasons.

China will focus on stabilizing headline growth likely in the 4.5% to 5.0% range, which could be a challenging proposition considering potential trade tariffs by the U.S. and other trading partners, and the continued weakness in its residential market, once a key driver of growth. Housing investment is unlikely to recover strongly in 2025, but the most recent monetary and fiscal easing measures have led to a noticeable improvement in housing transactions. Improving transaction volumes should in time translate into stabilizing land purchases, which are important as land sales are a key funding source for local governments, and construction values, which flow directly into GDP. While a sharp recovery in the housing market is unlikely, 2025 should see the sector trough and its negative spillover effects into household balance sheets, private consumption, and headline growth, mediate. That would constitute a win for Beijing and would be positive for Chinese and Hong Kong equities, particularly in the real estate sector.

Japan stands at the other end of the economic scale with the promise of permanently breaking out of its decades-long economic stagnation. In 2024, wage growth rose to levels last seen in the early ‘90s and real wage growth turned positive for the first time since 2021 (Figure 8), raising hopes that domestic consumption could become the economic growth engine that it has not been for many years. Much will depend on the spring wage negotiations, or Shunto, that take place in March, which will be key in determining the trajectory for wages, disposable incomes, and consumption.

Less well known, but almost as important to Japan’s newfound promise of economic dynamism, are the structural reforms taking place across corporate Japan. The ongoing takeover battle between private equity (PE) heavyweights Bain and KKR for Fuji Soft is only the most recent and visible symbol of a flurry of PE activity, with Japan ending 2024 as second only to the U.S. in private equity dealmaking. M&A guidelines were updated to improve corporate transparency and encourage consolidation, as seen by the recent merger plans between Honda and Nissan. Large cross-shareholdings, poison pills, and a generally weak focus on shareholder returns offer plenty of low-hanging fruit for Japanese corporates to pluck and come with the potential for new economic vigour and outsized share price gains in 2025.

Beyond the dynamics at play in China and Japan, the policy and economic environments remain varied across all individual markets in the region. Across the disparate backdrop of monetary policy, growth, and real estate fundamentals in the region, we have highest conviction on opportunities available in the REITs within the Japanese multifamily and Sydney office sectors.

Sydney Office

Headline figures for Sydney’s office market continued to paint a sobering picture in 2024, with vacancy of 14.7%, net effective rents 10.5% below their 2020 peak, and capital values down 21% from their 2022 highs. When looking at the most recent trend, however, we believe the second derivative across most key metrics has turned positive and will remain so as new supply is dwindling in a city that continues to grow and is seeing large corporate tenants come back to the market in search of high-quality office space. Net effective rents rose 3.0% year-on-year driven by 77,000 square meters of net absorption in the first nine months of 2024 (Figure 10) and vacancy edged down by 0.7% to 14.7%. Looking forward, new deliveries for 2025 are expected to total 108,000 square meters, though 71% of that space has already been pre-committed, and a similar dynamic is expected through 2027. As construction costs rise and regulatory and energy requirements grow, supply is likely to undershoot demand for a prolonged period. With office landlords trading at large discounts to net asset values on both spot and historical bases, listed office REITs offer a compelling long-term investment opportunity.