For real estate investment trusts, 2024 is a challenging year. However, this sector may present an excellent opportunity to find cheap stocks in 2024.

Due to high interest rates, real estate companies face increased financing acquisition costs, resulting in only 7% returns for REITs in 2024. Compared to the nearly 30% increase expected for the S&P 500 in 2024, this return appears very weak.

These stocks are trading at less than 17 times estimated funds from operations (FFO, the price-to-earnings equivalent metric for the REIT industry) for next year, compared to nearly 24 times before the Federal Reserve began raising interest rates in early 2022.

Currently, interest rates are slowly declining while the economy remains strong, which is another major benefit for the real estate market. According to a report released by Citigroup (C.N) on Wednesday, thanks to this favorable environment, REITs could see returns of 10% to 15% by 2025. While Citigroup warns that returns may vary significantly among different REITs, this return expectation exceeds the firm's forecast of an 8% return for the S&P 500 next year.

In investing in REITs, selecting sub-industries is crucial. Office building REITs have performed poorly since the pandemic, as millions of Americans turned to remote work. Even high-profile initiatives like Amazon's (AMZN.O) recent push to return to the office have failed to fully resolve the issue. Asset management company Pimco noted in its recent 2025 outlook that the "recovery in commercial real estate may be slow and uneven."

Meanwhile, residential and healthcare REITs may benefit from demographic trends that could drive demand growth in the coming years. For residential REITs, this demand mainly comes from millennials, many of whom are still eager to purchase their first home.

Healthcare REITs will benefit from the trend of the baby boomer generation gradually moving into retirement communities.

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

Citigroup's optimistic forecast for REITs in 2025 is based on 5% earnings growth, a 4% dividend yield, and "moderate multiple expansion," thanks to a more favorable interest rate environment.

"While lower interest rates are beneficial for asset pricing, the stability of interest rates is also very important," wrote Citigroup.

Here are 5 REITs favored by Citigroup: American Homes 4 Rent (AMH.N), Sun Communities (SUI.N), Omega Healthcare Investors (OHI.N), Ventas (VTR.N), EastGroup Properties (EGP.N)

Article reposted from: Jin Ten Data