Despite being among the worst-performing sectors in the past year, US real estate stocks are drawing attention from investors hopeful for a turnaround in 2024. Real estate investment trusts (REITs) faced challenges, with factors such as high interest rates and remote work trends weighing on share prices. However, optimism is rising due to falling inflation and expectations of an economic soft landing. The Real Estate sector of the S&P 500 declined by 3.4 per cent in 2023, contrasting with the broader S&P 500, which surged over 24 per cent.
Although the real estate sector has started 2024 on a downswing, some investors anticipate a reversal, especially if the Federal Reserve implements rate cuts as expected. Despite the real estate sector’s decline of 3.4 per cent in January, investors are growing more confident about a potential reversal, particularly if the Fed adopts aggressive rate-cutting measures. REITs stand to benefit from lower rates, reducing the cost of capital and driving revenue growth.
Global fund managers increased their exposure to REITs by 15 percentage points in December, reaching 12-month highs. The Schwab US REIT ETF, the largest US REIT-focused exchange-traded fund, witnessed significant net inflows in the last week, reflecting renewed investor interest.
Historically, the end of a Fed hiking cycle has been supportive for REITs. Since 1995, public REITs have gained 20.1 per cent in the year following the last rate increase of a cycle. This positive trend contrasts with the S&P 500, which averaged a 10 per cent gain in the 12 months after the Fed concluded the last hike of a cycle since 1980. With expectations of a more dovish stance by central banks, the outlook for REITs appears favorable in 2024. Despite the sector’s sensitivity to interest rate expectations, recent declines have made certain real estate stocks attractive to investors eyeing long-term potential. Notably, warehouse owner Prologis is gaining attention. The market has already witnessed merger and acquisition activity, with Blackstone acquiring Canadian real estate firm Tricon Residential for $3.5 billion, signaling potential opportunities for consolidation within the sector.
While challenges persist, including an oversupply of office space amid the shift to hybrid work policies, investors remain optimistic about a stabilisation of interest rate volatility, paving the way for potential growth in 2024. Key economic indicators and earnings reports from major companies in the sector, including Simon Property Group and American Tower, are expected to provide insights into the sector’s trajectory over the coming months.