Investors looking to allocate to real estate today should consider the listed market first, with REITs in particular priced to deliver annual returns in the high single digit range for the next several years, says Lisa Kaufman, head of global securities at LaSalle.
“We see public real estate as unequivocally more attractive than private real estate today,” Kaufman told Nareit’s REIT Report podcast.
Kaufman said the REIT market has been “really very rational” through the recent period of tightening financial conditions, “and financial conditions do remain in the driver's seat.” She noted that REIT returns “are attractive and we have a higher level of conviction in our outlook today just given the material tightening of financial conditions and the repricing that's already occurred in the REIT sector.”
REITs are underrepresented today in institutional real estate portfolios, Kaufman said. Listed real estate represents around 45% of institutional quality real estate worldwide, but only about 20% of investors’ real estate allocation. REITs have the additional benefit of being disproportionately weighted toward non-traditional property types like self-storage, health care, and data centers, she said.
Generally speaking, “we advocate that our clients maintain a strategic allocation to REITs, but also consider making additional tactical allocations when valuations are compelling and/or are offering meaningful discounts to private real estate values—like they are today,” Kaufman said.
Elsewhere in the interview, Kaufman noted that:
- “The public market has led the private market on the way down and it will lead on the way up.” If the cost of capital advantage reverses, “we could see REITs actively acquiring and we could see private companies coming public as a way to recapitalize.”
- LaSalle expects recessionary conditions to begin at some point this year, although the timing and the severity are still not clear.
- Cash flow from the single family home rental and self-storage sectors is likely to be resilient and the relative growth from these sectors, entering a period of economic weakness, is underappreciated by the market.