Wall St Week Ahead-Maligned US real estate sector draws buyers eyeing rate cuts

Simon Property

19/01/2024 21:59

By David Randall
       NEW YORK, Jan 19 (Reuters) - Falling inflation and
expectations of an economic soft landing are buoying hopes for
U.S. real estate stocks in 2024, even as the sector continues to
lag the broader market.
    Real estate investment trusts (REITs) were among the worst
performing sectors over the last year, with share prices weighed
down by factors ranging from high interest rates to tepid demand
for office space in an era of remote work. The Real Estate
sector  .SPLRCR  of the S&P 500 fell 3.4% in 2023, while the
broad S&P 500 index soared more than 24% last year and hit a
record high on Friday. 
    Real estate's pain has continued into 2024, pushing the
sector down 3.4% in January against a 1.4% gain for the S&P 500.
Yet some investors are growing more confident the trend will
reverse - especially if the Fed cuts rates as aggressively as
many investors expect. REITs benefit from lower rates which
reduce the cost of capital and fuel revenue growth.  
        "REITs were crushed by the fastest rate hiking cycle in
40 years, and are going to move in line with expectations of
rate cuts," said Justin McAuliffe, a research analyst at Gabelli
Funds who remains bullish on REITs such as American Tower
 AMT.N . 
    Investors have been wading back into the sector. Global fund
managers increased their exposure to REITs by 15 percentage
points in December, pushing allocations to 12-month highs,
according to the latest survey from BofA Global Research.  
    At the same time, the Schwab U.S. REIT ETF  SCHH.P  - the
largest US REIT-focused exchange traded fund- saw approximately
$35 million in net inflows over the last week, its largest since
October, according to data from analytics firm VettiFi. 
    Historically, the end of a Fed hiking cycle has been
supportive for REITs. Since 1995, public REITs have gained 20.1%
in the year following the last rate increase of a cycle,
according to data from CenterSquare Investment Management. The
S&P 500, meanwhile, gained an average of 10% in the 12 months
after the Fed finished the last hike of a cycle since 1980,
according to data from Putnam Investments. 
    "If central banks have truly turned more dovish, the setup
for REITs is favorable," CenterSquare wrote in its 2024 outlook.
    Of course, the sector’s sensitivity to interest rate
expectations can cut both ways: while real estate stocks rallied
along with the rest of the market in 2023 on expectations that
the Fed would pivot to rate cuts this year, they have been hit
this month as some investors recalibrated bets on how
aggressively the Fed might ease. 
    Jeff Doerfler, director of investment management at
Huntington Private Bank, said the declines make some of the
stocks in the sector, such as warehouse owner Prologis  PLD.N ,
more attractive over the long term. 
        "We're at the start of a cycle where lower cost of
capital will drive revenue growth and you'll get an increasing
amount of M&A," said Doerfler, who is overweight REITs overall.
    A taste of merger & acquisition activity came Friday, when
investment management company Blackstone  BX.N  announced that
it acquired Canadian real estate firm Tricon Residential
 TCN.TO  for $3.5 billion, an approximately 30% premium to its
most recent closing price. 
        Investors will get readings on the pace of inflation and
the economy next week with manufacturing PMI data released on
Thursday and personal consumption expenditures data released on
Friday, in addition to earnings from 3M, United Airlines and
Abbott Laboratories.
    Many REITs do not report earnings until later in the
quarter, with retail-focused company Simon Property Group
 SPG.N   scheduled to report its quarterly results Feb. 5 and
American Tower  AMT.N  scheduled for Feb 21. Prologis missed
analyst estimates when it reported results Jan. 17 and cited
weakness in freight demand. 
        Of course, plenty of obstacles remain for the sector -
chief among them an oversupply of office space that is unlikely
to be absorbed anytime soon.
    The shift to hybrid work policies will likely erase $800
billion from the value of office buildings in major ciites
worldwide by 2030, consulting firm McKinsey said in July. 
        Chris Miller, a portfolio manager at Allspring Global
Investments, remains bullish on the sector overall but says
stocks may need to climb “a wall of worry” over the course of
the year.
    Still, “we think will see a stabilization of interest rate
volatility and that gives us optimism going into 2024," he said.

 (Reporting by David Randall; Editing by Ira Iosebashvili David
Gregorio)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
 
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