A rebound in office attendance and resilient retail spending are helping to revive listed real estate investment trusts (REITs), said Perpetual portfolio manager Sean Roger.
As a result of the COVID-19 pandemic, REITs faced a raft of challenges, including employees moving to the working from home model, greater store closures and rising interest rates impacting asset valuations and share prices.
However, Perpetual has now expressed optimism for the sector as it exhibits strong signs of operational improvement.
“It was headwind on headwind for a few years, but now it feels like we might have turned the corner,” Roger said in a market update.
The return to office-based work is reviving REITs with prime assets in Sydney and Brisbane, as improved leasing activity and reduced tenant incentives signal a market rebound.
“There are definitely signs that office has started to turn the corner,” Roger said.
He added that this office market recovery is being complemented by resilient retail spending, underpinned by strong population growth.
“Because we’ve had decent population growth and limited supply growth, the amount of retail space per person has continued to reduce. So, spending on a per person basis might have reduced over the past couple of years under cost-of-living pressure, but aggregate retail spend has continued to increase,” Roger said.
A final factor supporting the recovery of REITs, Roger noted, is the easing of interest rate pressures, with the RBA expected to deliver several rate cuts over the remainder of 2025.
With REITs often being highly leveraged, a lower interest rate environment directly improves earnings as interest payments fall and asset valuations rise.
Late last year, real estate manager LaSalle Investment Management Securities similarly said it remained optimistic about REITs, suggesting they could be on the verge of a “new golden era”.
The manager highlighted a recurring pattern linked to improved performance, including four key elements: a dislocation in bank lending to real estate, widespread negative sentiment towards the sector, underperformance compared to broader equities and easing financial conditions.
“The current environment resembles the set-up for these historical golden eras, suggesting REITs may be on the cusp of its next golden era of investment,” said Matthew Sgrizzi, chief investment officer at LaSalle Investment Management Securities.
“A global monetary easing cycle is now underway, with several central banks cutting rates. Historically, REITs perform well in periods leading up to and following a central bank easing cycle.”
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