From data centres to Japanese hotels, where are REIT managers finding growth now?
REITs have underperformed global equities for three years, but that may be starting to turn. Hazelview Investments’ 2025 Global Public Real Estate Outlook Report notes that senior housing, healthcare, data centres and Japanese hotels were the strongest performers within REITs last year and their momentum is expected to continue.
Data centres are a growing institutional asset class that is difficult for most investors to access privately. REITs provide a liquid way to gain exposure to this in-demand real estate, Samual Sahn, managing partner and portfolio manager at Hazelview Investments, explains. The proliferation of AI and the need to store all that data is driving strong demand for data center space.
“The only true liquid way to access and invest in data centres today is through publicly traded REITs so that's why the REIT market is valuable from that lens for investors. It can give them asset access to an institutional asset class that they can't get otherwise,” explains Sahn.
Additionally, Japanese hotels are also expected to benefit from both a recovering tourism sector and a depreciated yen. “We see strong demand from foreign tourists traveling throughout Japan, leading to an improvement in revenue per available room [RevPAR] and improvement in occupancy rates,” he notes. Additionally, the resurgence of business travel as companies return to in-office operations has further bolstered the sector’s recovery.
Turning to senior housing, Sahn identified strong demographic tailwinds as the 80-plus age cohort is projected to grow nearly 5 per cent annually through 2042, fuelling demand for senior housing units, he explains. On the supply side, the number of new projects remains historically low, creating favourable conditions for higher occupancy rates, stronger rental income, and robust EBITDA growth.
Global REITS’ valuations remain robust
The latter half of 2024 marked the beginning of a recovery fuelled by a more favourable monetary policy environment as Sahn emphasizes this inflection points presents an opportunity for investors. “Valuations are the most attractive they have been on a relative basis over the last three years,” he explains. “If we have a more favourable rate backdrop heading into next year, combined with continued strong fundamentals in top line growth, in EBITDA and in earnings, we think that recipe should lead to better performance in 2025.”
For institutional investors who have been underweight in REITs or are considering a reallocation, Sahn believes now is a pivotal time to revisit the sector. When asked about the factors behind the current valuations, Sahn notes while 2021 was a great year for REITs, which were up over 30 per cent in some markets, sharp interest rate hikes came in at the start of 2022 to curb inflation. Additionally, while REIT earnings have cumulatively grown by over 15 per cent over the last three years, their multiples have compressed even further.
This divergence, according to Sahn, has created an attractive entry point for investors as the sector transitions into a more stable rate environment. “Private market valuations inflected in the back half of last year, and we’re starting to see improvement,” he says while highlighting excessive volatility in rates has historically made it difficult for private market owners to underwrite real estate investments, underscoring the need for a stable capital market environment.
Domestically, the Canadian REIT market is also seen as a prime opportunity, with attractive valuations and exposure to high-growth sectors like senior housing. "When we look at the Canadian REIT market, valuations are attractive," said Sam. "Multiples are discounted relative to the TSX and stocks are trading below net asset value, which means you're buying the shares at a discount to their intrinsic value. The way the central bank is lowering rates will be supportive of real estate valuations, which in turn, should bleed through to REITs in a positive sense.”
