2022 Global Public Real Estate Outlook Report: REITs positioned for a strong recovery

TORONTO, Dec. 13, 2021 /CNW/ - According to Hazelview Investment's 2022 Global Public Real Estate Outlook Report, publicly traded global REITs are once again well positioned to serve as an inflation hedging asset class that will benefit from a continued economic recovery resulting in another year of above trend growth. In this report, the Hazelview investment team located in Canada, the United States, Europe and Asia provide commentary on the circumstances that contributed to a successful 2021 for REITs and the fundamentals that will support strong performance in 2022.

"Looking at our valuation models for the global REIT sector, current pricing suggests a 19% upside potential on a weighted average basis to our forward-looking intrinsic value," says Corrado Russo, Senior Managing Director, Investments & Head of Public Real Estate Investments. "This equates to an annualized total return of 12 to 15 percent when combined with current dividends and assuming a two-year window to approach intrinsic value."

The report suggests that while REITs are currently trading at a discount compared to global equities on an historical basis, the potential for sustained inflation will drive earnings growth higher and ultimately real estate valuations.

"Pricing power is the highest it has been in over a decade. Companies and REITs alike are able to pass along cost increases resulting in a boost to revenues," said Samuel Sahn, Portfolio Manager, Public Real Estate Investments. "We anticipate that earnings growth will be the primary performance driver in 2022 with property types like single family rentals, cell towers, data centers, industrial and self-storage being well positioned to benefit from increases in market rents."

According to the report, the Top Five Investment Opportunities are as follows:

Industrial facilities in North America, benefiting from supply chain disruptions and low inventory levels

Beyond the e-commerce boom that has been accelerated by the pandemic leading to strong and growing demand for industrial space, inflation has resulted in higher transportation and wage costs. This is causing tenants to move quickly to secure last mile space to deliver goods to their customers. Also, a replenishment of inventory as the global economy recovers from the supply chain crisis in the next 2-3 years will increase demand for space by upward of 550 million square feet.

Favorable U.S. residential supply and demand dynamics, leading to outsized rent growth

Pricing power for landlords has recovered faster than expected and apartment rents have rebounded strongly from the effects of the pandemic, driven by a surge in demand for housing. Growth in renewal rates and declining resident turnover is leading to an outstanding comeback for market rents. This is paired with the ever-increasing trend of millennials preferring to rent residential space versus purchase, a trend also impacted by the rising cost of home ownership.

In manufactured housing, particularly, there has been a lack of development due to factors like restrictive zoning laws and regulations. From a supply perspective, the single-family rental sector is benefitting from an under-investment in new affordable residential construction since the 2008 Financial Crisis, which has created a housing shortage that cannot be easily or quickly rectified.

Attractive arbitrage opportunity in European office REITs, trading at a material discount to private market valuations

For the public market, the European office sector offers a great liquidity profile, and buyers are able to pay far less than they would in the private markets for comparable product. Demand for office assets in the private market remains robust, where buyers are looking for long-duration cash-flowing assets with attractive yields to benchmark government rates. However, in the public market, negative sentiment about the pandemic's long-term impact on office spaces has created an opportunity. Based on our observation, this outlook is not nearly as dire as headlines suggest, and Europe is positioned to come out on top compared to other global office markets due to factors like short commute times (long times being a driver behind the popularity of work from home globally), and its workforce being driven primarily by small and medium-sized enterprises who had an easier time bringing employees back to work during the early pandemic recovery period.

Data centers in Asia, poised to deliver robust earnings growth in 2022

Early-stage adoption of cloud computing and enterprise software spend are two trends that are positioning Asian data centers for outsized growth next year. The pandemic has accelerated the timeline of cloud adoption by three to five years in Asia, as a growing workforce of remote employees has pushed mid-sized and large corporations to migrate their IT infrastructure to the cloud. Operators in Singapore and Japan are expected to outperform in this sector.

In Singapore, a moratorium on new data center construction has led to one of the lowest vacancy rates (circa 2%) for a tier-1 market globally. Singapore's role as an Asia-Pacific data center hub stems from the country's stable power grid, proximity to SE Asia, and an abundance of subsea cables connecting to Asia-Pacific, Europe, and North America. With strong demand from cloud service providers, landlords with pre-approved expansions and new developments are expected to benefit until the supply moratorium is relaxed.

In Japan, where data center market (489 MW currently) is expected to double from 2021 to 2024, Tokyo is poised to benefit from power availability and an array of transmission lines in the area. As a top financial and technology center in the Asia-Pacific Region, Tokyo should see strong demand for space moving forward, especially from hyperscale customers with a global presence.

Cell towers around the world, benefiting from the roll-out of 5G

Globally, cell tower demand is expected to reach record levels next year, driven by the deployment of 5G cellular networks. Mobile data usage is projected to grow by over 25 percent by 2026. As both the number of devices and traffic per device accelerates in 2022, the need for tower space will grow resulting in wireless carriers adding new telecommunication equipment to either a new site or an existing site.

From an economic perspective, towers perform better when operated by a tower REIT because they will add density to the tower to achieve a superior return, while a wireless carrier is very unlikely to lease space to a competitor. This means, the wireless carriers can sell their tower portfolios to a REIT at a low going-in yield, which allows them to raise capital while the REIT acquires a portfolio that has significant growth potential.

About Hazelview Investments:
Hazelview Investments has been an active investor, owner, and manager of global real estate investments since 1999 and remains committed to creating value for people and places. Hazelview employs a global investment and asset management team of more than 80 people in its offices in Toronto, New York, Hong Kong and Hamburg and manages CAD 10.3 billion in real estate assets. To learn more visit hazelview.com.

SOURCE Hazelview Investments Inc.

Stephanie Turner, Proof Strategies for Hazelview Investments, [email protected], [phone]