BCA Research told investors in a recent note to take a cautious approach to the recent rally in real estate, which has been the best-performing sector in the S&P 500, with distressed sectors such as office REITs leading the charge.
However, BCA analysts warn that this momentum may not be sustainable.
While property’s dividend yield looks attractive amid falling interest rates, BCA cites several challenges that could affect the sector.
“REITs will struggle if economic growth falters despite interest rate cuts,” the note explains.
BCA explains that historically, REITs tend to outperform shortly before the first rate cut, but consolidate gains shortly thereafter, a pattern investors should note.
Fundamentally, BCA says the outlook for real estate is mixed. Although balance sheets remain healthy, the company notes that “net operating income is slowing” and profit margins have only returned to pre-pandemic levels.
In addition, disruptions related to the pandemic are said to have created pockets of distress within the sector, which are now widening.
BCA advises investors to undervalue certain subsectors, including industrial REITs, which are facing pressure from the manufacturing downturn and slowing online retail sales, and residential REITs, which are dominated by apartment units struggling with overbuilding, slow increase in rents and increase in delinquencies.
BCA adds that the Office REITs sub-sector is also facing headwinds due to rising vacancy rates and rising NPLs.
The research house recommends an overinvested position in Specialized REITs, which offer exposure to the digital economy.
“Underinvested position in real estate over a regular investment horizon,” says BCA. advises to maintain an underinvested position in real estate in the short term, anticipating a slowdown in economic growth. We expect economic growth to slow and even lower interest rates will not benefit the industry in such conditions. Furthermore, delinquency rates are increasing and widening across all subsectors, which does not bode well for the sector’s performance.”
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Reference;
Boughedda, S. (2024) BCA says investors should fade the real estate rally By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/stock-market-news/bca-says-investors-should-fade-the-real-estate-rally-3647917 (Accessed: 5 October 2024).
