Real estate stocks and the related ETFs are notoriously rate-sensitive assets. It’s not surprising that the run up to and the delivery of the Federal Reserve’s rate cuts were beneficial to the sector.
As one example of that theme, the ALPS Active REIT ETF (REIT) surged 12.76% for the 90 days ending Oct. 4. In recent days, there’s been some modest profit-taking in real estate stocks and ETFs, but market observers believe the outlook for the sector has improved considerably with rate cuts. With the Fed expected to lower interest rates by another 100 basis points through the second quarter, there’s something to that assertion.
“The outlook for the $13.2 trillion real estate market is brightening as values broadly start to stabilize after a difficult two years – a decline we had expected. This creates opportunities that go beyond lower interest rates, we think. Sticky inflation makes real estate more attractive medium term,” according to BlackRock research.
Macro Environment Could Be Catalyst for REIT
Lower interest rates are crucial for real estate investment trusts (REITs) because the industry is highly capital-intensive with many companies in the space carrying large debt burdens. That means lower financing costs by way of Fed easing are a credible catalyst for real estate stocks.
“As rates come down, lower financing costs and reduced yields in other markets like credit and money markets should boost real estate’s relative appeal. Capitalization rates for public real estate investment trusts had surged as real estate values retreated in recent years, but now they are starting to fall, reflecting rising valuations on expected cash flows,” added BlackRock.
Inflation is another catalyst for real estate equities, including REIT member firms. While inflation has cooled markedly off the highs seen in 2022, it’s still elevated enough that the inflation-fighting traits offered by the real estate sector are appealing.
On a related note, many REITs, including some residing in the ALPS ETF, have inflation escalators baked into their contracts with tenants, meaning they can gradually raise rent over time in response to inflation.
Specific to REIT, the fund may offer investors some advantages due to active management, including an ability to tap into property value opportunities.
“We think real estate funds deploying capital in coming years can benefit from better starting values. Outcomes can vary widely, making implementation key,” concluded BlackRock.
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