One of the quiet winners over the past two years has been the local real estate investment trust (Reit) sector. The index has nearly doubled since January 2024, with strong distributions and price moves resulting in a return of almost 90%.
This while all the attention has been on precious metals, AI and other FOMO trades. But the move in Reits was long overdue, as the sector finally managed its way out of the Covid crisis. While most Reit investment specialists expected a strong year eventually, after 2024 most did not expect a repeat in 2025. But after a 35.8% return for the index in 2024, we had 38.6% in 2025.
The Reit crisis can now officially be declared over. The start of the crisis actually goes back a decade, when most locally listed Reits traded at a premium to their NAV and had yields below local long bond rates. Traditionally, you want to buy a Reit below NAV and with yields above government long bonds; otherwise, you may as well buy the lower-risk bonds. At the core of the Reit crisis were loan-to-value (LTV) levels that in many cases exceeded 50%, a wildly high number.
Covid lockdowns were just the nail in the coffin that set the industry up for a serious cleanup
In late 2017/early 2018 the local Reit sector peaked and prices started falling. Covid lockdowns were just the nail in the coffin that set the industry up for a serious cleanup.
Reits exited less attractive investments and paid down debt. As the interest rate cycle turned down, they refinanced at the lower rates. This has helped them to get LTVs to below 40% in most cases, with the few exceptions being in the low 40s.
Demand in retail has also returned, while logistics has boomed. Office space, however, remains tricky, but the worst is behind the sector, and rental reversions are in some cases starting to turn positive.
All of this made the sector very attractive in 2023/2024, as yields were around 10% and into the mid-teens for some smaller, more niche Reits. There were also further discounts to NAV of at least 25%-30%, with some closer to 50%. Hence the huge rally in the past two years.
But now what for the sector?
Well, the price rerating has happened, and we won’t get that again. But we are seeing yield growth that supports the current prices. So as a Reit holder, we can expect good yields growing at about 5% over the next few years. Added to that will be at best modest price increases, as the discount to NAV has narrowed to about 15% — in my opinion, the ideal discount.
I have been holding Reit ETFs for several years (having arrived too early for the rally), and I continue to hold. I mostly hold ETFs here, and I do so in my tax-free account, as Reit distributions are taxed as income.
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