Miniature House on A Financial Graph

Publicly traded global real estate investment trusts (REITs) had a very strong 2021, and investors with exposure in 2022 should expect more of the same, according to a report released Monday.

Toronto-based Hazelview Investments’ global outlook report called for a target total return of 12% to 15% for REITs in the year ahead.

“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,” said Corrado Russo, the firm’s senior managing director of investments and head of public real estate investments, in a release.

“This equates to an annualized total return of 12% to 15% when combined with current dividends and assuming a two-year window to approach intrinsic value,” he added.

That range compares with a forecast of 15% to 20% in the firm’s report a year ago, a target that was outpaced. Strong demand, occupancy rates and pricing power were all boons in 2021, the report said, with global REITs up 24.7% year to date as of Dec. 6.

REITs are trading at a discount when compared with global equities historically, it said, but, for 2022, inflation trends will also play a role in how well the sector does and which REITs are most attractive.

“We believe the potential of sustained inflation will act as a tailwind for real estate valuations and coupled with strengthening fundamentals this will drive attractive earnings growth,” the report said.

Properties with both short- and long-term leases may benefit in an inflationary environment, it said. Expectations for higher inflation may “improve the negotiating power of landlords” and result in higher rents for properties with short-term leases, while properties with long-term leases can be used as inflation hedges.

A strong economy — the consensus forecast is for 4.4% global real GDP growth in 2022 — will also support REITs’ pricing power and earnings growth, the report said.

Of course, Covid-19 variants and regulatory changes could impact rental inflation and other elements, so the firm recommends a bottom-up approach and vigilance.

Investment opportunities

Potential areas of strength for the year ahead include industrial facilities across North America, the U.S. residential sector and cell towers, the report noted.

Looking further afield, data centres in Asia and office REITs in Europe offer some opportunity, as does self-storage space in Australia, which is benefiting from more people working from home.

One of the biggest risks for REITs is monetary policy missteps.

“Should central banks become more aggressive fighting inflation (significantly tightening monetary policy), this could create a headwind for equities (REITs included),” it said.

Yet if rate hikes around the globe are slow and if there’s “healthy economic growth,” then real estate investors are likely to see “top line revenue growth outpacing higher debt costs that typically come with rising rates.”

A report last week from real estate investment services company Colliers listed environmental, social and governance (ESG) factors, demand for core-plus offices and rising construction costs as trends to watch next year.