After a tough 2022, LaSalle Investment Management Securities chief investment officer Matt Sgrizzi said the headwinds that hit GREITs should ease, providing opportunities to generate better returns.
While Mr Sgrizzi added that a US recession could dampen any significant rebound, the next year should see improved performance.
“There’s no doubt it is going to be a more challenging economic environment. After a strong recovery from the pandemic in 2021, in which REITs gained 27 per cent, 2022 was a much tougher year and GREITs recorded a 22 per cent decline as central banks pushed back against higher inflation,” he said.
“However, as a result, a large portion of the GREIT universe has now been repriced. The performance of GREITs is justified within the context of the tightening financial conditions. However, we don’t run from risk; rather, we try to price risk so that we’re properly compensated when it’s particularly high.
“GREITs are now priced to deliver high single-digit returns this year, which is in line with historical returns from moderately leveraged real estate assets. The adjustment was painful but the forecast on the sector is constructive and real estate should also be viewed by investors as a good hedge against inflation.”
Mr Sgrizzi said areas that can access durable growth at attractive prices are key opportunities within GREITs, pointing to sectors such as self-storage, data centres, residential and industrial areas.
“Megatrends like digital transformation, insufficient affordable housing and e-commerce will further support the fundamentals of these sectors,” he said.
“This durable growth will be especially valuable in a lower economic growth environment. There had been concerns about the impact of tighter financial conditions on these sectors, but this impact is largely behind us, and these sectors have been repriced to attractive levels.”
According to Mr Sgrizzi, property assets with high leverage, and the office subsector are high-risk factors within the sector.
“The cost of debt has risen so that puts pressure on private real estate values, and while we don’t see volatility as a risk in itself, the potential for the permanent loss of capital is a risk, so we’ll be steering clear of companies with high leverage,” he said.
“The woes of the office market have also been well documented, and we don’t see this improving anytime soon. Ultimately, the hybrid work environment is here to stay and it’s unlikely we’ll have people back in the office permanently five days a week, and it costs money to maintain buildings.”
