Real estate stocks extend losses as rates soar

Vornado Realty Trust

22/09/2023 21:14

By Sinéad Carew
       Sept 22 (Reuters) - 
    Shares in real estate companies fell on Friday, adding to a
massive sell-off the previous day, when bond yields jumped to
their highest levels in 16 years after the Federal Reserve
signaled that U.S. interest rates would stay high for longer. 
  
        The S&P 500 real estate index  .SPLRCR  lost 0.7% on
Friday after falling 3.5% on Thursday, which was its biggest
daily decline since March when the banking sector was in crisis.
  
        The U.S. Treasury 10-year yield  US10YT=RR , fell
slightly on Friday, after rising on Thursday to around 4.5%, its
highest since 2007. This provided tempting returns for
fixed-income assets, making the relatively high dividend payouts
of Real Estate Investment Trusts (REITs) a little less tempting.
  
        REITs also tend to borrow heavily so the prospect of
higher rates for longer puts pressure on their profit outlook.
While the Fed decided not to hike interest rates after its
meeting on Wednesday, it indicated that rates could stay at
elevated levels for longer than investors had expected. 
  
    "Not only are REIT's bond substitutes but they also rely on
borrowing so that just makes them doubly
interest-rate-sensitive," said Jack Ablin, chief investment
officer of Cresset Capital who says that even though the sector
seems cheap by some measures, he is not ready to step in right
now.
    The S&P 500 real estate index is the second weakest
performer among the benchmark S&P 500's 11 major sectors with a
decline 6.5% so far this year, second only to utilities'
 .SPLRCU  10.3% drop. This compares with year-to-date a gain of
about 15% for the benchmark index.
    But Gina Szymanksi, portfolio manager for REITs at AEW
Capital Management, said she expects Treasury yields will peak
around current levels, which will help REIT stocks that have
"already baked in" 10-year Treasury yields in this range.
    "The knee-jerk reaction is, as interest rates rise, you sell
REITs. It's not totally unrealistic. They are capital intensive
businesses that require financing," said Szymanski, adding that 
if 10-year yields rise sharply from here it would add pressure
to REIT stocks. 
    But if the economy weakens, REITs often outperform.
    "When the Fed tries to slow the economy, it's usually
successful. That usually results in declining earnings for
companies in general and when that happens it's the time for
REITs to shine," says Szymanksi who estimates a roughly 20%
total return for real estate stocks in the next two years.
    On Friday the biggest real estate loser was American Tower
 AMT.N , which finished down 1.8% while the biggest gainer was
Extra Space Storage  EXR.N , up 1.2%. 
    Alexandria Real Estate Equities  ARE.N  fell 1.6% on Friday,
after losing 8% on Thursday and hitting its lowest level since
2016. 

 (Reporting By Sinéad Carew, editing by Lance Tupper and David
Gregorio)
 ((sinead.carew@thomsonreuters.com; +13322191897;))