Three members of Citi’s global real estate research team—Nick Joseph in the U.S., Aaron Guy in the U.K., and Howard Penny in Australia—were guests on the latest episode of the Nareit REIT Report podcast.
Amid the market cross currents of slower global economic growth, offset to some extent by anticipated lower interest rates, “we are generally constructive on commercial real estate in 2024,” Joseph said. At the same time, Citi’s 2024 global real estate outlook also stresses the importance of stock picking, rather than broader sector and subsector allocations.
For the U.S., Citi is projecting total returns for REITs of 10% to 15% in 2024, with adjusted FFO growth of about 3%. “Growth is being driven by slowing but still solid operating results, development and the redevelopment benefit that is coming on, and the retention of free cash flow,” Joseph said.
Meanwhile, 2024 will be a stock picker’s year, he said. Citi has looked at the top and bottom quartile of REIT performance since 2000, and that gap is about 50 percentage points in any given year, “so there’s massive alpha opportunity within the listed real estate space. And in times of economic stress, that gap is even wider.”
As for where opportunities exist in 2024, Guy pointed to “trying to maximize the polarization that we see in the market.” He said Citi believes the best strategy is to be “positively defensive.” That means finding stocks that have the strongest rental growth trends and can withstand or perform positively in a recession or lower rate environment. He pointed to the German residential and U.K. logistics markets as sectors that fit this description.
Penny, meanwhile, noted that Australia is expected to be one of the strongest growing developed market economies in the next few years, fueled by the inflow of skilled migrants. “This is creating a very positive growth environment for many real estate sectors, including housing, self-storage, industrial, and even retail,” he said.
Citi’s top picks for the Australian REIT sector are “stocks where we see stronger net operating income in order to outperform the still-rising finance costs that we’re seeing,” Penny said.