The Outlook for Listed Real Estate

A new cycle for listed real estate began in the fourth quarter of 2023 with the recognition of a pause in central bank interest rate hikes. We believe the absence of hikes will be powerful for listed real estate, even without a significant fall in target rates themselves. Historically, real estate has done well during periods of range-bound long-term yields at similar levels to today. During 2001-2007, U.S. 10-year bonds yielded between approximately 4%-5% and listed real estate generated double digit average returns. Listed real estate’s strong access to capital currently, as compared to more constrained private real estate participants, should be maintained in such an environment in the future.

Listed real estate has performed well during periods of range-bound long-term yields

Across real estate sectors, we see earnings accelerating into 2025. Globally, we expect 5% earnings growth, which is approximately double that of 2024 levels. The strength is broad based: private pay senior housing continues to capitalize on powerful demographics; data center growth is accelerating with generative AI; cell towers are gradually recovering from customer churn; manufactured housing and apartments are improving in a new year; while retail and net leases continue to perform, aided by supply/demand and their prevailing costs of capital. Below are our earnings expectations by U.S. sector.

Listed real estate growth is accelerating in 2025

Our expectations assume minimal external growth by acquisition. Our view on earnings is affirmed by lower levels of to-be-built supply likely across most real estate sectors, today’s strong occupancies with steady levels of global GDP growth and the ability to refinance. As shown in the below graphs, forward supply growth is decelerating relative to historical levels for selected sectors.

Net new supply as a % of national inventory, by property type, 1982-2026F

Listed real estate’s access to capital, both in debt and equity, is currently superior relative to broad private markets. This access to capital provides listed real estate the potential to go on offense and boost earnings by acquisitions. The situation is somewhat reminiscent of the 1991-1997 period for REITs (during which they delivered an ~20% annualized return) and gained while private markets lacked capital. On the unsecured debt front, listed real estate issuance has been sizable over the last two years. Over $70bn of unsecured debt has been issued at borrowing rates approximately 150-200bps lower than that for private markets. Debt has been issued across sectors—even in the beleaguered office sector, which has dominated negative-leaning news flow in recent years.

On the equity front, we see recent improvement in listed trading valuations. Some REITs are trading closer to or at a premium to net asset valuation. While the most notable examples of valuation support have occurred in 2024 in healthcare, we see the potential for valuation improvement to broaden as the listed real estate cycle progresses.

History suggests that investors should not fear a moderate net asset value premium in REITs. As of November 2024, the asset class is still at a discount (we see an ~11% global discount on conservative net asset value estimates). Historically, the emergence of a net asset value premium has allowed REITs to issue stock, buy properties at a reasonable arbitrage and improve their earnings potential. A rise in earnings tends to support rising valuations, which leads to a virtuous cycle (a series of events that build on each other, creating a continuous process of improvement) that can endure for a sustained period.

We believe that this virtuous cycle has supported asset-class level performance in the past. Strong average annual returns have been demonstrated during prior periods where REITs traded at a premium to net asset value. We show these in the graph below.

U.S. REITs—NAV premiums have supported strong annual returns

When we look at the math, the total return opportunity for REITs is compelling. Listed real estate offers an approximately 4% dividend yield, which is competitive compared to private real estate income. That dividend is growing and based on a conservative payout level. Our base-level mid-single digit earnings growth has the opportunity for upside, while multiple expansion offers further opportunity. When we consider the levels of relative outperformance generated by our global strategies since inception, we believe listed real estate can offer the opportunity for up to double digit annualized returns over the next five years.

In an environment of moderating central bank target rates and range-bound long-term yields, we believe listed real estate can prosper. The potential for positive earnings revisions, driven by a differentiated cost of capital, is reminiscent of one of the strongest periods in recent history. In our view, in 2025 listed real estate should provide a strong opportunity for both asset class returns and for outperformance driven by our positioning.