Improving macro conditions and value-affirming opportunities in global REITs suggest a positive outlook for this sector. Mark Mazzarella (Dexus) considers the key drivers of future performance for global REITs.

When considering the macroeconomic environment, investors cannot disregard the uncertainty that comes with increased geopolitics, deglobalisation, and the effects of tariffs on the global economy.

The fact that gold is trading at record highs, indicates there is growing demand by investors for defensive assets and safe havens amid this uncertainty.

Compared to more volatile equity markets facing higher inflation and falling consumer sentiment, REITs, backed by hard assets, are viewed as defensive investments. For Mark Mazzarella, CFA — Head of Real Estate Securities at Dexus — the current environment makes commercial real estate particularly attractive, considering it has a relatively visible and defensive cashflow profile, given the lease obligations that underpin the solid earnings of this asset.

“Over the past few years, REIT investors have faced challenges. However, we are now seeing  motivated vendors, the cost of capital stabilising, and activity set to improve. This will benefit the REITs sector,” says Mark.

“We’re also in a market where the interest rates that adversely affected this sector through 2022 and 2023, have now normalised. This means the cost of capital for many REITs is now quite visible, allowing for greater investment opportunities, with capital allocation in REITs driving growth and value accretion, which as an investor, is what you’re after,” says Mark.

Speaking on global REITs at the IMAP Independent Thought 2025 conference in Melbourne, Mark says all developed markets (with the exception of Japan) have begun to cut interest rates, which is a definite driver for future performance of liquid real assets, like global REITs.

However, what really excites Mark about this sector are the fundamentals on the operations side of real assets, which are excellent across select segments, and where Dexus has large over-weight positions. For example, he cites seniors living, which is running at occupancy rates that are almost normalised post-COVID. Also, he is excited by retail occupancy, with a REIT like a Westfield (Scentre Group in Australia) having a 99.5 per cent occupancy rate.

Mark adds that earlier this year, Dexus made its first Japanese office REIT investment. He says the office vacancy rate in central Tokyo has moved from a peak of 6 per cent 18 months ago, to now being closer to 2-3 per cent. And in a portfolio that has exposure to the sub-market of Shibuya (a major commercial district in Tokyo), the vacancy rate is around 1 per cent.

In making the case for global REITs, Mark points to the “clear inflection in earnings growth” — due to a combination of factors, like market conditions, company performance, and customer behaviour — of the REITs sector. He says given the normalisation of interest rates and with fundamental top-line growth being relatively sound, the earnings per share (EPS) growth outlook for the global REITs sector is positive.

“Global GDP growth is moving down, but global real estate EPS growth for annualised periods out to 2027 have been revised and are moving up,” he says.

Mark adds the inflection in earnings growth is just one area responsible for the closing of ‘fair value discounts’ on offer in the global REITs sector. (The discount is an adjustment made to an asset’s valuation or purchase price to account for factors that would reduce its price in a market sale, whereas closing the discount means the asset’s full or nominal value increases to arrive at its true market worth, thus removing the discount.) 

“As the inflection in earnings growth becomes more understood and appreciated by investors, we anticipate a closing of fair value discounts, which will provide a really solid outlook for total returns,” he says.

Mark adds another important consideration for global REITs is real estate transaction activity. He says direct and corporate deal volumes are starting to improve, as liquidity and M&A activity in the sector becomes stronger.

“This shows there is more certainty in the underlying assets’ values, providing investors with greater confidence allocating capital to corporate transactions and M&A activity. Effectively, that is also crystallising the closing of fair value discounts on offer.”

He says the improvement in direct and corporate transaction volumes is another factor that can be attributed to the closing of fair value discounts in the sector.

“We’ve seen some significant corporate transactions and M&A activity, which are ‘value-affirming transactions’ (see below) that are more nuanced. This includes carve-out transactions or mandated sell-downs by boards that have conducted strategic reviews, as well as M&A transactions and ‘take-privates’ (when a company that is publicly traded is acquired and becomes privately owned),” says Mark. “We see that continuing in the mid-cap REIT space, which has a market cap of between US$2-10 billion. In our view, this is particularly fertile ground for relative alpha.”

In making the case for global REITs, Mark points to the “clear inflection in earnings growth” — due to a combination of factors, like market conditions, company performance, and customer behaviour — of the REITs sector. He says given the normalisation of interest rates and with fundamental top-line growth being relatively sound, the earnings per share (EPS) growth outlook for the global REITs sector is positive.

“Global GDP growth is moving down, but global real estate EPS growth for annualised periods out to 2027 have been revised and are moving up,” he says.

Mark adds the inflection in earnings growth is just one area responsible for the closing of ‘fair value discounts’ on offer in the global REITs sector. (The discount is an adjustment made to an asset’s valuation or purchase price to account for factors that would reduce its price in a market sale, whereas closing the discount means the asset’s full or nominal value increases to arrive at its true market worth, thus removing the discount.) 

“As the inflection in earnings growth becomes more understood and appreciated by investors, we anticipate a closing of fair value discounts, which will provide a really solid outlook for total returns,” he says.

Mark adds another important consideration for global REITs is real estate transaction activity. He says direct and corporate deal volumes are starting to improve, as liquidity and M&A activity in the sector becomes stronger.

“This shows there is more certainty in the underlying assets’ values, providing investors with greater confidence allocating capital to corporate transactions and M&A activity. Effectively, that is also crystallising the closing of fair value discounts on offer.”

He says the improvement in direct and corporate transaction volumes is another factor that can be attributed to the closing of fair value discounts in the sector.

“We’ve seen some significant corporate transactions and M&A activity, which are ‘value-affirming transactions’ (see below) that are more nuanced. This includes carve-out transactions or mandated sell-downs by boards that have conducted strategic reviews, as well as M&A transactions and ‘take-privates’ (when a company that is publicly traded is acquired and becomes privately owned),” says Mark. “We see that continuing in the mid-cap REIT space, which has a market cap of between US$2-10 billion. In our view, this is particularly fertile ground for relative alpha.”

<sub>Opportunities in value-affirming transactions

As market conditions improve — which is helping to enhance growth and value in the global REITs sector — and fair value discounts close, Mark says there are opportunities for investors to access ‘value-affirming transactions’ (transactions that provide added value to the investor), particularly in the small and mid-cap REIT sectors. He refers to three of these opportunities:

• Private equity ‘put’;
• Carve-out transactions; and
• Shareholder activism.

Private equity ‘put’: According to Mark, one of these value-affirming transactions is what Dexus refers to as exercising the private equity ‘put’. (The ‘put’ is the private equity firm’s commitment to the target company through investing capital and taking on the risk that the company’s performance might not improve.)

Plymouth REIT — a portfolio of 204 industrial buildings concentrated in key U.S. manufacturing regions — is one such example, which Dexus observed in the market and took a position on.

“We identified a fantastic opportunity in this portfolio, which had been sold down quite aggressively, because global private equity firm, Sixth Street, had undertaken refinancing for Plymouth and acquired some equity warrants as part of the deal. However, the market didn’t understand this, and aggressively sold off Plymouth late last year,” says Mark.

“Subsequently, Plymouth fell off the radar. We conducted our due diligence and realised we could access a portfolio of industrial assets at an implied cap rate (a metric used to determine the value and potential returns of a property) of over 9 per cent, in a market where comparable assets were actively trading at close to 6.5 to 7 per cent. We were very confident that we were buying these assets at a relatively attractive price. So, we took an active position with that REIT.”

Mark adds it was only a matter of time before the market realised the value of the Plymouth REIT. Eventually, Sixth Street implemented a transaction proposal to privatise the entire portfolio, which effectively closed the fair value discount for this REIT.

Carve-out transactions: Another type of value-affirming transaction opportunity that Mark refers to are carve-out transactions (the sale or separation of a subsidiary, division, or other part of a larger business enterprise), which often highlight the inherent value missed by the market in an investment. He says carve-out transactions can provide signals to investors in relation to significant value disparities on offer in the market.

As an example, he points to City Office REIT — an office landlord with a portfolio of 57 office buildings in Orlando, Tampa, Phoenix and other U.S. ‘sunbelt’ cities. This REIT had a latent life sciences portfolio within it, which the market didn’t assign any value to.

“This meant, you effectively got this component of the portfolio for free. We saw the value in this REIT and took an active position with it,” says Mark.

City Office then sold its life sciences portfolio (valued at about US$600 million) to Harrison Street (an alternative investment manager focused on real estate, infrastructure and credit strategies), which enabled City Office to extinguish all of its debt with the proceeds of the sale. This saw its share price almost double, which validated Dexus’ call on the City Office REIT.

Shareholder activism: The third value-affirming transaction opportunity identified by Mark is shareholder activism. He says shareholder activism has increasingly been a driver of corporate activity, which also encourages the closure of discounts to fair value.

He cites Urban Logistics REIT — a specialist owner of U.K. urban infill logistics properties — which was purchased with an implied cap rate of 8 per cent. However, Dexus pegged (a stock valuation metric that combines a company’s price-to-earnings ratio with its earnings growth rate over a set period) the portfolio at closer to a 6 to 6.5 per cent implied cap rate.

“From those assets being adequately reflected in implied pricing, this indicates there was upwards of 35 per cent upside potential with this REIT. We were happy to take on this portfolio, irrespective of any corporate activity. However, there was investor activism, which resulted in the merger of the Urban Logistics REIT with a much larger REIT — LondonMetric Property — which remains in our portfolio today.”

Another example of shareholder activism is Elme Communities — a portfolio of class A and B apartment properties, and one office asset across the Washington D.C and Atlanta metropolitan areas — which was effectively pushed by an activist investor to conduct a strategic review. The market would not reflect a discount to fair value, and with no merger opportunity, the board decided to sell the entire portfolio.

The board was able to sell half the portfolio at a fairly strong price, and then announced it would sell the remaining half of the portfolio over a 24-month period, effectively closing the fair value discount.