SMSF advisers and trustees have overlooked real estate investment trusts (REIT) in favour of equities, but with the increasing demand for data centres and the stable growth of e-commerce, the sector is primed for a new period of strong growth and returns, according to a global property investment manager.
LaSalle Investment Management Securities chief investment officer Matthew Sgrizzi said real estate was “the economy in a box” and the high level of attention focused on a handful of technology stocks in the United States meant the underlying physical assets behind those firms had been forgotten.
“Real estate is an asset class unto itself because it’s a hybrid between equities and bonds. It has a strong income component to its total return – like bonds, they are long-life assets and cash flows grow with the fundamentals of the property sector and ultimately with inflation over time,” Sgrizzi told selfmanagedsuper.
“Additionally, the income return from REITs is double the income return from equities and that has been the case for more than 25 years, and where interest rates are low, the income return that you get from REITs is well above bonds as well.”
He said the conditions of the past few years, where banks have pulled back from real estate lending, there is broad negative sentiment to real estate investments while equity markets have flattened and interest rates easing has taken place, also preceded three sizeable upticks in the REIT sector.
“We are expecting another ‘golden era’ where returns are strong in an absolute sense and outperform equities as the REIT market changes in some way for the better,” he said.
“Where are we in the cycle for financial conditions? We’ve seen the beginning of an easing cycle play out. Interest rates have come down and concerns about tariffs and consumer spending means equities are down and this is the time where REITs start to outperform again.”
He said while the growth of e-commerce has been factored into real estate returns, developments in data centres and artificial intelligence will be a key driver in the future for REITs.
“The demand for the buildings are the main driver of cash flows for real estate sectors and data centres and AI is a key driver of the global economy right now,” he said.
“The fundamentals for data centres are super strong and there is a lot of supply, but it’s not enough.
“Leasing activity for AI firms has been gangbusters and there is effectively no available space in the traditional data centre market.
“Vacancy rates are 2 per cent in Europe, in the US, and rents have pretty much doubled over the past couple of years.”
