Real estate stocks extend losses as rates soar
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[September 23, 2023] By
Sinéad Carew
(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 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, 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.
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"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' 10.3% drop. This compares with
year-to-date a gain of about 15% for the benchmark index.
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A Wall Street sign is pictured outside the New York Stock Exchange
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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, which
finished down 1.8% while the biggest gainer was Extra Space Storage,
up 1.2%.
Alexandria Real Estate Equities 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)
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