Modest growth in the global economy could position real estate investment trusts (REITs) to deliver double-digit total returns in 2020, according to a new report from Timbercreek Investment Management Inc.
REITs have predictable cash flows tied to contractual leases, which hold up well to changing economic conditions, the report noted. REITs have traditionally outperformed the S&P 500 index 62% of the time when U.S. GDP growth averages between 1-2%, and by more than 600 basis points annually, generating an average annual absolute return of 18%.
With consensus estimates calling for U.S. GDP growth of 1.8% this year, Timbercreek expects global REITs to deliver total returns of 10-12%. But what are the juiciest REIT investment opportunities in 2020? Timbercreek’s report had several suggestions, three of which are highlighted below.
U.S. cell tower REITs
Timbercreek described U.S. cell tower REITs as one of its top investment opportunities in 2020, driven in part by the “5G wireless revolution.”
The report noted that mobile data consumption in the U.S. is expected to grow by more than 30% annually through 2024. The current average smartphone user’s data consumption of 10 GB per month has doubled in less than three years.
Growing demand for cellular data will require wireless carriers to add significant equipment to existing macro cell towers, and the number of small cells — used to propagate the 5G signal — is expected to increase tenfold by 2026, according to the report.
“We believe 5G will only accelerate this growth trend,” Timbercreek said, predicting that cell tower REITs will see double-digit earnings growth in 2020, leading to higher share prices and relative outperformance over the next 12 months.
Canadian industrial REITs
A change in Canadian consumers’ shopping habits is creating a “strong demand” for industrial space among businesses, according to Timbercreek.
Consumers have traditionally done their shopping at malls, supporting rents at those locations. But now, with more retail sales taking place online, money is increasingly flowing through distribution warehouses, the report noted.
As the demand for industrial space has risen, so too have construction costs, which have put pressure on development yields and curtailed new developments, Timbercreek noted.
“We believe rents and asset values are likely to further increase in 2020 given that industrial vacancy rates are low, and demand is supported by a longer-term structural shift in consumer consumption patterns,” the report stated.
Japanese hotel sector
Timbercreek said it was “enthusiastic” about Japan’s hotel sector in 2020, which is expected to benefit from an easing of Japanese/South Korean tensions, the 2020 Tokyo Olympic Games and the 2021 World Masters Games in Kansai.
The report said that inbound foreign travel is expected to grow by 40 million tourists in 2020 — more than a 30% increase from 2018 levels. But tourists who prefer luxury accommodations may find fancy digs hard to find.
Timbercreek noted that Tokyo, Osaka and Kyoto have all added hotel rooms in anticipation of city-wide events, but more than 85% of the new supply is in the limited-service segment. The best investment opportunity in 2020, the report predicted, would be in the full-service, upscale/upper-scale category.
“Japan has a significant lack of upper-class and full-service hotel offerings and we expect to see attractive [revenue per available room] growth from these two categories in 2020 driven by both occupancy and [American Depository Receipt] increases,” the report stated.
For more REIT investment opportunities in 2020, read Timbercreek’s report.