By Ian Salisbury

It has been a difficult year for real estate investment trusts. The sector may be a great place to hunt for bargains in 2024.

REITs have returned just 7% in 2024, thanks in large part to stubbornly high interest rates, which make it more expensive for real estate companies to finance purchases. It's a meager gain compared to the S&P 500's nearly 30% climb in 2024.

These stocks trade at less than 17 times next year's estimated funds from operations, or FFO, the REIT industry's equivalent of a price-to-earnings ratio. That's down from nearly 24 times in early 2022 before the Federal Reserve started hiking interest rates.

Now rates are slowly coming down, while the economy remains strong, another boon for the property market. Helped by the favorable environment, REITs could return 10% to 15% in 2025, according to a note from Citigroup Wednesday. While Citigroup warns there could be a wide variation in returns among individual REITs, that beats the firm's forecast for an 8% return for the broader S&P 500 next year.

Choosing a subsector is key when it comes to REITs. Office REITs have struggled since the pandemic prompted millions of Americans to start working from home. Return-to-office mandates, like the recent high-profile moves by Amazon.com, haven't solved the problem. Commercial real estate's "recovery will likely be slow and uneven," noted a recent 2025 outlook on the sector from asset manager Pimco.

At the same time, residential and healthcare REITs stand to gain from demographic trends that could drive demand for years to come. In the case of residential, that demand is from millennials, many of whom are still longing to buy their first home.

Healthcare REITs, for their part, should benefit from waves of baby boomers who are moving into retirement communities.

"With the U.S. government target to spend $6.2 trillion in healthcare until 2028, demand for hospitals, nursing facilities and medical office buildings are increasing," wrote S&P Global Market Intelligence analyst Vedant Bagri, in his recent REIT outlook.

Citi's bullish 2025 REIT forecast assumes 5% earnings growth, 4% dividend yield, and "modest multiple expansion," thanks to a more favorable rate environment.

"While lower rates are better for asset pricing, stability of rates is also very important," Citigroup writes.

Here are five REITs Citi is bullish on:

American Homes 4 Rent

Ticker: AMH

Sector: Single-family homes

Forward FFO: 20

Sun Communities

Ticker: SUI

Sector: Manufactured homes

Forward FFO: 17

Omega Healthcare Investors

Ticker: OHI

Sector: Healthcare

Forward FFO: 13

Ventas

Ticker: VTR

Sector: Healthcare

Forward FFO: 18

EastGroup Properties

Ticker: EGP

Sector: Industrial

Forward FFO: 19

Source: Citigroup, FactSet

Write to Ian Salisbury at ian.salisbury@barrons.com

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December 13, 2024 03:00 ET (08:00 GMT)

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