By Jayson Forrest
Mark Mazzarella (Dexus) outlines the key characteristics of REITs, which he believes makes this sector an attractive real assets opportunity for investors.
For a number of years, real estate investment trusts (REITs) have underperformed due to a combination of factors, including rising interest rates, concerns about commercial real estate, and a constrained bank lending environment, all of which negatively impacted investor sentiment towards REITs.
But the REITs story is changing. More recently, due to the post-COVID recovery, strong migration numbers, and stabilisation of office occupancy rates, which drive net operating income for retail and office REITs, the sector is again performing well. These factors, says Mark Mazzarella, CFA — Head of Real Estate Securities at Dexus — are providing opportunities for investors in the real assets sector.
Essentially, a real asset is an asset you can touch and feel, and whose intrinsic value is inextricably linked to its physical use. Examples include: real estate (grocery shopping stores), infrastructure (airports), and commodities (natural gas).
Mark Mazzarella, CFA
Dexus
Speaking on the topic of ‘Why consider REITs for real asset exposure?’ at the 2025 IMAP Portfolio Management Conference in Sydney, Mark points to a number of characteristics that make REITs a compelling offering for investors wanting exposure to real assets. These include:
- Liquid access to growing secular trends (like data centres and seniors living), which are publicly traded on developed market exchanges;
- High quality portfolios that are managed by specialists;
- Defensively managed portfolios; and
- Attractive relative value.
This is one of those asset classes you need to know from the bottom-up. You need to be able to touch and feel the asset, and know what’s happening in the underlying markets. And while the REITs sector is only a small part of the overall market — about 2.2 per cent of the global equities universe — it still accounts for about AUD$2.5 trillion of the investible universe
Returns that are linked to inflation
Mark acknowledges that the post-COVID years saw a spike in inflation, which corresponded with a decline in REIT returns. However, he says with the drop in inflation, the economic environment has now changed, which has seen REIT returns revert back up. As an example, he cites last year, where global REITs (G-REITs) were up 12-14 per cent. “In fact, G-REIT returns have outperformed inflation in 65 per cent of the last 30 years.”
In making the case for REITs, Mark says the sector has historically achieved better returns when inflation is around 2-3 per cent, which is good news for Australian investors, with the current inflation rate sitting at 2.4 per cent.
“If we look at REIT returns over the last 12 months and line that up with inflation over the same period, inflation has usually been within the 2-3 per cent range targeted by central banks. So, within that range, REITs have typically performed very well. They have provided an attractive absolute return between 8-12 per cent,” says Mark.
According to Mark, accessing alternative real estate sub-sectors can lower correlations to broader economic cycles. He points to a number of sub-sectors — industrial, lodging, shopping malls — that have a pro-cyclical bias or correlation to GDP, while other sectors (free-standing retail, healthcare, self-storage) have an anti-cyclical correlation to GDP.
“So, the benefits to a portfolio of actively optimising your exposure to REITs, given where the economic cycle is at, is really valuable,” says Mark. To illustrate the point, he refers to the Dexus portfolio, which is relatively biased towards seniors living and some segments of retail that are considered essential, like grocery shopping centres.
There was performance dispersion of around 40 per cent between the top and bottom performing sectors in calendar 2024. So, there are great opportunities to really pick the eyes out of the sector
Active management provides an edge
Mark believes active management definitely provides REITs with an edge. He says that deep specialist industry knowledge and active due diligence can uncover unique investment opportunities in the REITs sector.
“This is one of those asset classes you need to know from the bottom-up,” says Mark. “You need to be able to touch and feel the asset, and know what’s happening in the underlying markets. And while the REITs sector is only a small part of the overall market — about 2.2 per cent of the global equities universe — it still accounts for about AUD$2.5 trillion of the investible universe.”
Through active management, Mark says REITs offer investors the opportunity to add genuine value to their portfolio. He believes REITs are conducive for alpha generation in portfolios, pointing to the wide dispersion between sectors and markets in this space.
He adds: “There was performance dispersion of around 40 per cent between the top and bottom performing sectors in calendar 2024. So, there are great opportunities to really pick the eyes out of the sector.”
We take a lot of comfort — and so should investors and portfolio allocators — in the underlying drivers of return for real assets. By understanding those drivers, investors — who can actively allocate to those sectors and markets that have the best opportunity for attractive relative returns into the future — will be positioned to do quite well
Expectations and outlook for the sector
Although an easing of interest rate policies by central banks has provided a supportive macro backdrop for the REITs sector, Mark is mindful of lower economic and GDP growth. He says the likelihood of interest rates continuing to decline, with markets pricing in a cut of between 70-80bps over the next 12 months by both the U.S. Federal Reserve and RBA, will ultimately benefit the REITs sector.
“This is positive for the sector, because REITs just need certainty in their cost of capital,” says Mark. “Pleasingly, interest rates have stabilised and are no longer as volatile as they have been, which provides the sector with greater certainty moving forward.”
In fact, this ‘closer to certainty in the cost of capital’, is one of Dexus’ four key expectations for the REIT sector moving forward.
“Every developed market has begun to cut rates, with global GDP growth revised downward,” says Mark. “However, because of the attributes and structures within real assets, like leasing indexation, REITs have the ability to reset their debt books and take advantage of optimising their re-leasing outcomes in demand, supply and constrained markets. And with global real estate earnings per share (EPS) growth ahead of global GDP growth, we believe this is a positive sign for REIT returns on a relative basis.”
Dexus’ second expectation for the sector is the likelihood of macro dominating. According to Mark: “Macro is going to continue to drive the bus, but with some short-term volatility along the way.”
He adds: “We take a lot of comfort — and so should investors and portfolio allocators — in the underlying drivers of return for real assets. By understanding those drivers, investors — who can actively allocate to those sectors and markets that have the best opportunity for attractive relative returns into the future — will be positioned to do quite well.”
As its third expectation for the sector, Dexus expects the disconnect between listed and unlisted valuations to continue. Based on its numbers, at the end of February 2025, there was anywhere between a 10 and 23 per cent discount to fair value across Dexus’ models.
“No doubt, that’s probably changed to the upside, given the moves in equity markets over recent weeks. And while there might be some risk weightings that will be changed on the back of that, it nonetheless is still an indication of the relative value we see on offer,” says Mark.
Finally, Dexus’ fourth expectation for the sector is for advisers and portfolio managers to continue to take a selective approach to the sector when choosing investments and opportunities to invest in.
Stagflation is difficult for real estate investing, but not insurmountable. There are sectors that give you access to inflationary forces in a low GDP growth environment. You just need to be laser-focused on the underlying locality and metrics of that market or portfolio
Risk of recession and stagflation
And what of the risk of recession and the impact on this sector? Mark acknowledges that both managers and investors have been talking about and preparing for a recession for a number of years, but it hasn’t yet materialised. As part of Dexus’ forward thinking view of the REITs sector, the risk of recession has already been factored in.
“Although a recession may still happen, the possibility of that happening has already been reflected in the bottom-up approach of how our portfolio has been constructed. That’s because we have leaned into those sub-sectors that have a more anti-cyclical exposure to GDP growth, like seniors living and essential retail services (like grocery anchored in shopping malls). We’re less likely to lean into highly cyclical GDP-type real estate sectors, like office.”
And what about increasing talk about stagflation?
“Stagflation is difficult for real estate investing, but not insurmountable,” says Mark. “There are sectors that give you access to inflationary forces in a low GDP growth environment. You just need to be laser-focused on the underlying locality and metrics of that market or portfolio.”
About
Mark Mazzarella, CFA is Head of Real Estate Securities at Dexus.
He spoke on the topic ‘Why consider REITs for real asset exposure?’ at the 2025 IMAP Portfolio Management Conference in Sydney.