Matthew Sgrizzi, chief investment officer and portfolio manager at LaSalle Investment Management Securities, expects a strong performance from real estate investment trusts (REITs) in 2025, with the potential for a “golden era” driven strong demand for commercial property against short supply coupled with further easing in inflation and interest rates.

According to Matthew Sgrizzi, given strong financial positions, access to capital markets and increasing investor confidence, REITs are positioned to benefit from an improving environment that could lead to outperformance.

"We believe that the REIT market is poised for a significant upturn, potentially entering a new ‘golden era’ of investment," said Mr Sgrizzi.

“The convergence of a number of factors, including a period of dislocation in bank lending, negative market sentiment, REIT underperformance, and the potential for an easing of financial conditions, mirrors the circumstances that have preceded previous periods of exceptional growth in the REIT market," he said.

“Real estate fundamentals are broadly healthy; they are super strong in the data centre and healthcare sectors, and we have an outlook for low supply being a tailwind for core REIT sectors of office, retail industrial and residential in 2025. That low supply should support the outlook for many real estate sectors around the world this year,” he said.

“Even concerns gripping the office sector are fading. We now see high-quality offices are in high demand and short supply in many markets around the world; we are seeing rents increase in some locations for office space,” said Mr Sgrizzi.

“We’ve also seen real estate lending is picking up and real estate capital formation is improving, along with opportunities for investors.”

Mr Sgrizzi says overhyped positivity on stock markets and negativity on real estate has historically set the stage for REIT investors to enjoy multi-year periods of improvement and outperformance. He is reminding investors to add back real estate to portfolios to enjoy strong expected returns which compare well to global equities, if not better.

Mr Sgrizzi's base case projection for REITs is for total returns of in the high single digits per annum over the next three years, with close to half of that return from income. If financial conditions ease further, those return expectations could he higher. Over the past 25 years, REITs have produced total returns of 8% per annum, with around half that return coming from income.

“If financial conditions ease further, such as by 50 basis points or 100 basis points, return expectations could increase to mid- to high-double digits, respectively, potentially setting the stage for the next ‘golden era’ in REITs,” he said.

Importantly too, if interest rates fall, so will borrowing costs for REITs. The majority of REIT borrowing is from the unsecured loan market, at interest rates that are almost 100 basis points lower than a traditional mortgage, currently. Lower interest rates would reduce these borrowing costs further.

In terms of sector and geographic opportunities, Mr Sgrizzi sees strong growth in data centres and healthcare REITs and he favours Europe and the UK given subdued prices.

“Today’s REIT sector is so broad and diverse. We are seeing some great opportunities in sectors that took a big hit in the fourth quarter, particularly interest rate sensitive sectors that have higher longer term growth potential or are more yield orientated, such as cell towers, and those sectors could do quite well this year, given they have been sold down,” he said.

“We see the same thing with REITs in Europe and the UK, which have taken a hit in the last couple of months with higher interest rates and in reaction to US policy changes; UK REITs are about as cheap compared to US REITS as the group has ever been and there is also less upside pressure on interest rates in Europe compared to the US.