Investing.com -- As Europe enters 2025, optimism surrounding the real estate sector is growing, with analysts at Jefferies forecasting strong total shareholder returns for listed real estate companies.
Despite a challenging economic backdrop, the outlook for the sector has improved significantly, driven by growth in funds from operations and net asset value.
In fact, Jefferies projects double-digit capital returns for the year, supported by mid-single-digit dividend yields.
The analysts are particularly bullish on the sector’s ability to bounce back from the lows reached in 2024, noting that M&A activity is expected to accelerate.
They predict a 20% to 25% total shareholder returns for the year, a figure that aligns with expectations from the US REIT market.
The growth trajectory for funds from operations is expected to accelerate, with the price-to-funds from operations ratio remaining 17% below its 10-year average.
Additionally, Jefferies anticipates average asset value growth of 1.7% across the 30 stocks under their coverage, despite the equity market currently pricing an 18% implied decline in valuations.
While concerns over debt maturities in Europe remain, with more than €38 billion due in 2025, the analysts believe that companies' balance sheets are in a far stronger position than they were two years ago.
Loan-to-value ratios and interest coverage ratios, which had been a major source of concern in 2022, have stabilized, and overall debt levels have declined by 4% over the past 18 months.
Amid this positive backdrop, Jefferies has upgraded 11 names across Continental Europe, citing six key trends that are expected to shape the real estate market in 2025.
One of the major themes identified by Jefferies is the stabilization of logistics stocks.
The analysts believe that much of the derating in the logistics sector is behind us, as most of the negative impacts of the cycle have already been priced in.
This has prompted the analysts to upgrade logistics stocks such as Montea and VGP to “buy,” while maintaining a “hold” rating on WDP.
Retail, which has been under pressure in recent years, is also expected to see a strong performance in 2025.
Jefferies flags that retail sales have remained relatively stable, vacancy rates are low, and companies in the sector are well-positioned to make opportunistic acquisitions.
As a result, Jefferies upgraded Unibail-Rodamco-Westfield and Mercialys (EPA:MERY) to “buy.”
The residential sector is another area that Jefferies expects to outperform.
Both traditional residential properties and student residences are seen as attractive investments, particularly given their lower cyclicality.
In particular, Jefferies upgraded LEG Immobilien, a top pick in Germany, to “buy,” while also placing Grand City and Vonovia on a “hold” rating.
They remain positive on student housing and continue to recommend Xior.
The office market in Continental Europe is also showing signs of polarization. While prime offices are seeing record-low vacancy rates and rising rents, peripheral markets continue to experience valuation declines.
Jefferies maintains a “buy” rating on Gecina (EPA:GFCP), Colonial, and Covivio, which are well-positioned in the prime office sector.
Healthcare real estate is another sector that Jefferies believes will perform well in 2025.
With demographic trends improving and occupancy rates on the rise, rental risks are expected to remain low.
As a result, Jefferies upgraded Aedifica to “buy” and continues to hold a “buy” rating on Cofinimmo (EBR:COFB).
Finally, Jefferies expects data center stocks to remain active in 2025, driven by the growing demand for IT capacity fueled by the rise of artificial intelligence.
The analysts anticipate that more companies will explore the development of data centers on their own land banks, supporting continued growth in the sector.
Jefferies upgraded Merlin Properties to “buy,” while maintaining a positive outlook on other players in the space, such as Segro (LON:SGRO), Merlin Properties, VGP, and WDP.