Real estate euphoria highlights trader angst for end to rate hikes
REAL estate finished November as the second best performing group in the S&P 500 Index adding 12 per cent, trailing slightly behind tech’s 13 per cent gain. The momentum was fuelled by bets that the central bank may begin cutting rates as early as next year.
In November, the interest-rate sensitive sector was a market outperformer as investors poured capital into the group. A pullback in Treasury yields has also supported trader optimism that the worst of it could be over. Additionally, US real estate investment trusts (Reits), which have been beaten-down by surging interest rates and economic uncertainty, are now flashing signs of strength.
The group rallied 12 per cent in November versus the S&P 500’s 9 per cent gain, notching its best month since 2011. Bank of America said it’s overweight the real estate sector ahead of 2024, with its analyst Jeffrey Spector calling the Reit sector equity’s “diamond in the rough”. He listed American Homes 4 Rent, Americold Realty Trust, Empire State Realty Trust, Kimco Realty Corp, Prologis and Welltower as his top picks in a note to clients on Friday (Dec 1).
Battered office landlord stocks have placed an overcast on the Reit sector as a whole, though office represents only a sliver of the group. Investors have been fleeing the office sector as fears of remote work and elevated borrowing costs destabilise the sector.
“Real estate has seen the biggest de-rating since 2021 among all industries on concerns over office, but office is less than 5 per cent of real estate’s market cap,” he said.
While Bank of America remains cautious on the market entering 2024, it still sees real estate as underappreciated.
A NEWSLETTER FOR YOU
Tuesday, 12 pm
Property Insights
Get an exclusive analysis of real estate and property news in Singapore and beyond.
For homebuilding stocks, the bulk of the monthly advance was made during the first three sessions of November after the Federal Reserve announced it would hold its benchmark rate steady for a second meeting. The index posted three back-to-back gains of more than 4 per cent, ultimately sending the index to post its biggest monthly gain since 2020.
The recent pullback in mortgage rates is likely to further support the sector’s gains, enabling builders to buy down rates to 5.5 per cent, a level that has previously helped demand, Bloomberg Intelligence analyst Drew Reading said.
“This would actually make new home payments more favourable versus resales heading into the spring selling season, so the timing is great for the group,” he noted.
Although builder confidence has been on the decline, Capital Economics US property economist Thomas Ryan says the sentiment is a misrepresentation of where larger public builders actually stand, as the gauge is largely comprised of smaller private builders.
Therefore, the typical strong correlation between National Association of Home Builders homebuilder confidence and housing starts has broken down recently, he said. That divergence was underscored in November after the confidence gauge fell to its lowest level this year, despite housing starts unexpectedly rising to the highest in three months.
“While smaller homebuilders are finding it increasingly difficult to access the credit required to maintain construction activity, their giant competitors are in an extremely strong financial position,” Ryan wrote.
The real estate sector still lags behind the broader market year-to-date, but according to Bank of America, the group may be a bright spot heading into 2024.
Share with us your feedback on BT's products and services
