The performance of global real estate investment trusts was halved to 4.6 per cent in 2024, largely attributed to tentative discourse by the U.S. Federal Reserve on the direction of interest rate cut policy, according to a new report from Hazelview Investments.
It found the continued demand for senior housing in North America and the surge in interest for data centres will drive the real estate investment market in 2025. The health care (25.2 per cent) and data centres (23.7 per cent) sectors offered the highest returns last year due to increase demand and limited supply, the report said.
Read: Commercial real estate challenges forcing Canadian pension funds to re-evaluate strategy: report
Samuel Sahn, managing partner and portfolio manager at Hazelview, says demand for data centres is being driven by the needs of hyper-scale customers and enterprise users for digital applications and artificial intelligence cloud computing. “All that demand is causing a significant inflow in the amount of space required, but at the same time there’s been a lot of supply constraints.”
Similarly, demand for senior housing is growing due to the ageing baby boomer population, and limited new construction will cause existing operators to increase rents as they absorb the ongoing demand.
“Those secular trends in senior housing and data centres . . . took off in 2024 and you’re going to see them persist in 2025 and beyond.”
He says the drop in the valuations of REITs are due to the aggressive interest rate policy from central banks starting in 2022, which caused a re-pricing effect for real estate assets, as well as a decline in private market valuations.
“One of the areas of the market that really jumps off the page is the fact that REITs are cheap. The valuation shows substantial upside — 20 per cent upside from current levels — and we think the sector has the potential to re-rate over the next 12 months.”
The report found Canada’s REIT market delivered a 1.1 per cent return in 2024. He says the country is also experiencing a growing need for senior housing, noting Canadian REIT valuations are discounted to the fair market value. Australia (10.6 per cent) and the U.S. (7.9 per cent) earned the leading spots for performance of REITs by country in 2024.
It also found REITs are in a better cost-of-capital environment compared to private real estate owners and can more comfortably go into the market to buy property and expand their portfolios.
“In 2025, we expect to see a lot more acquisition activity from the public companies than we have seen over the last two years,” says Sahn.
Read: Canadian pension funds seeking diversification in real estate at home, abroad: experts