Scotiabank Market Factors: How to pick the REITs that will outperform in 2025
Real estate
The numbers that really matter for REITs
Scotiabank REIT analysts Mario Saric and Himanshu Gupta highlighted one selection method that consistently outperformed value, momentum, quality, and market cap strategies in a Monday research report. In ten of the past 17 years, the REITs with the highest forecast FFOPU [funds from operations per unit] at the beginning of the year outperformed during that calendar year. This includes 2024.
The analysts found, perhaps surprisingly, that value strategies have underperformed in the REIT sector. The lowest price to net asset value (P/NAV) REITs have only outperformed during four of the past 17 years. Choosing REITs with the highest distribution yield has also been an underperformer for most years.
In terms of the overall REIT sector relative to other equity market segments, REITs have been trading near a 20 per cent discount to net asset value since 2022, which Scotiabank describes as “compelling” value (even if the individual REITs with the most attractive P/NAV are unlikely to outperform their growthier counterparts).
The analysts find the sector reasonably valued with respect to profitability relative to corporate and government bond yields. All told, they estimate the sector in 2025 can generate a 15 per cent total return if domestic GDP growth reaches 2.0 per cent or better, and private transactions accelerate to provide price discovery.
After uncovering forecasted FFOPU as the key to outperformance, the report ranked real estate subsectors according to this metric. The list, in order: seniors housing, the niche sectors of self-storage and health care, residential, industrial, retail and office.
In terms of individual REITs providing strong FFOPU growth expectations, the analysts highlight Chartwell Retirement Residences, Storagevault Canada, Interrent REIT, Nexus REIT, Sienna Senior Living and Granite REIT.
This report had a specific focus – to find the early year criteria that lead to full-year outperformance. The analysts also emphasized that the top driver of returns over longer-term time horizons will be REITs that are able to grow net asset value per unit.