Global Listed Real Estate: Where are we in the Listed Real Estate Cycle?

At the mid-year mark, listed real estate stocks have weathered the headwinds of delayed expectations for global central bank policy rate cuts. They sit modestly below year-end 2023 levels, while offering the potential of an outsized total return opportunity over the next five years. When we review listed real estate, we find:

• The prospects for a new listed real estate cycle that began in the fourth quarter of 2023.
• The potential for strong returns, powered by a combination of dividend yield, earnings growth, discounted valuations, and the contributions of active management.
• Supportive company fundamentals and the dynamics of capital markets that favor listed real estate.

Where Are We in the Listed Real Estate Cycle

One of the most common questions we get today is about our positioning in the global listed real estate cycle. We believe a new cycle began in the fourth quarter of 2023, following nearly two years of negative asset-class returns, with the recognition of a potential pause in global central bank interest rate hikes. While expectations for central bank target rates continue to shift over the course of 2024, we believe we are clearly past the point of interest rate hikes; historically, the absence of hikes has been favorable for real estate.

The listed real estate cycle is shown in Figure 1 below.

The phases of the Listed Real Estate cycle

In the past, with the end of a prior cycle, listed real estate has often overshot fair value and traded at a material discount to private markets. We see this condition today. At end of Q2 2024, global real estate stood at a double-digit discount to our assessment of net asset value, with implied cap rates several hundred basis points wide of private market appraised values. Compared to broad equities, REITs also sit at an approximate 20% discount on a forward multiple basis, compared to a history of a roughly on par valuation. This relative valuation disconnect has been exacerbated in the first six months of 2024, as global equities continue to extend and concentrate gains dominated by AI beneficiaries and large cap tech stocks. Whether from private markets, if liquidity is available, or from broad equities, we see an opportunity to de-risk holdings and add to those in listed real estate.

The Building Blocks of Listed Real Estate Total Return

We believe REITs have the potential to deliver a robust annualized return, powered by a mid-single digit current dividend yield, mid-single digit annualized earnings growth, modest multiple expansion from depressed levels and the potential for active management. With this view, some of CBRE Investment Management’s largest listed REIT institutional investors increased their holdings in 2024. We expect that as the asset class begins to perform, allocations from more investors will flow into listed real estate. We believe investors are at the starting line in this new cycle of anticipated improved listed real estate returns.

The REIT return proposition

Company Fundamentals and the Dynamics of Capital Markets Are Supportive of Listed REITs

We believe listed real estate is well-positioned from a fundamental perspective. Despite high profile examples from the industrial sector during the Q1 2024 reporting season, we see conservatively listed real estate earnings growth in 2024, with the potential for acceleration into 2025. Our view on earnings acceleration continues to be shaped by multiple factors: the ability to drive rental growth across retail, lodging, residential and other assets with a tightening supply/demand dynamic; the secular demographic changes shaping future healthcare needs; and the prized position of data centers (and burgeoning development) in a generative AI world.

Our expectations for 2025 earnings acceleration, when coupled with a compelling >4% dividend yield today and the prospects for forward multiple expansion, drive our optimism for REITs. Below, we showcase supply trends across retail, logistics, office, and apartments; we generally see a benign outlook ahead.

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

In Q1, notable privatizations of public REITs included single-family for rent and apartment portfolios that received large premiums and benefitted CBRE IM’s listed strategies. In Q2, momentum continued, with purchases in May and June by Brookfield and KKR of different multifamily portfolios. These transactions, and implied pricing, were largely supportive of listed apartment REITs, which delivered some of the best relative returns in the second quarter.

Looking ahead, we see the potential for REITs to enter the listed market, as participants seek to capitalize on the advantage of access to capital that listed REITs hold. In 2024, we saw the successful IPO of American Healthcare REIT, which owns medical office, senior housing, skilled nursing and other healthcare-related facilities. In the future, we expect that Lineage Logistics, a temperature-controlled storage and logistics provider, will pursue an offering over $3 billion, eclipsing prior REIT IPOs, and supporting a potential total enterprise value above $30 billion.

When taken together, we see capital markets activity as supporting both the compelling valuation opportunity in listed REITs and their differentiated ability to raise capital. At this stage in the global real estate cycle, the differentiated ability to raise capital relative to undercapitalized private market participants is compelling. With the ability to raise equity, participate in accretive joint ventures, and access the unsecured debt market (where over $25 billion USD has been issued in 2024 thus far), we see listed REITs as retaining the ability to make accretive acquisitions—representing a source of potential upside compared to consensus expectations.

The Road Ahead for Listed Real Estate

As we exit the second quarter and navigate the public markets, we remain optimistic on our ability to deliver value through active management and build upon what we see as a compelling total return opportunity for the asset class. We believe a new cycle for listed real estate began in the fourth quarter of 2023 and the asset class is poised to provide investors with compelling returns. To capitalize on this current opportunity, we seek to own a well-balanced portfolio of securities that have been screened for their growth prospects in combination with the quality of their business models, assets, balance sheets and management teams. We are positive on property types, regions and stocks that offer these qualities at attractive relative valuations, while we manage our portfolios with the goal of consistent risk adjusted outperformance. As we pass the midpoint of 2024, we look forward to a new cycle for listed real estate and the value that active management can unlock for investors, regions and stocks that offer these qualities at attractive relative valuations, while we manage our portfolios with the goal of consistent risk.