Real estate, REIT opportunities in this high rate environment

The dark cloud hanging over the US real estate market may be casting an even longer shadow on REITs, or real estate investment trusts. The Federal Reserve’s sentiment on keeping interest rates higher for longer has prolonged elevated mortgage rates, which have run rampant and impaired Americans’ ability to buy or own a home.

Janus Henderson Investors Global Real Estate Portfolio Manager Gregory Kuhl and Haendel St. Juste, Mizuho Senior Equity Research Analyst for REITs and Homebuilders, sit down with Yahoo Finance’s Market Domination to talk about the Fed’s monetary policy and its reverberations felt by REITs and the broader real estate industry.

“We’re pretty optimistic that assuming we are done in terms of Fed rate hikes and higher rates, listed REITs today are priced for the interest rate environment that we have, which means they can do well,” Kuhl explains, adding: “It’s not an issue of fundamentals, it’s purely an issue of valuation, which we think we’re getting towards the end of.”

Kuhl and St. Juste weigh in on areas of the real estate sector that show promise, naming a few standout stocks from the landscape.

“We point people to sectors where there’s clear demand tailwinds — apartments, healthcare data centers, and stocks [with] names with, pricing power, better than average earnings growth to alleviate some of those concerns,” St. Juste comments.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video Transcript

Real estate stocks are having a real tough time.This year, the sector has lagged behind the broader market down nearly 7% in 2024 amid a broader market rally.But one key conviction could spark a major upside in the months to come.We’re looking at how to navigate the big picture with the Yahoo finance playbook and join us to discuss Handel Saint, just senior equity research analyst at Mizuho cover reits alongside Gregory.Cool global real estate portfolio manager at Janice.He Henderson investors.Welcome to you both.And Greg, maybe I’ll start with you.Um uh Listen, we talked reeds, obviously a lot of very interesting verticals, Greg to get into there, but maybe you saw a big picture 30,000 ft view.Uh Greg, how are you thinking about reeds in general?Are you, are you general broadly bullish here, Greg?Hi, thanks for having me.You know, I I would say yes with the right time frame.So I think what’s really important to remember about res is uh you know, this is an in interest rate sensitive asset class.Um And as we talk about listed res we reprice every day in the market versus maybe private real estate.That doesn’t.Right.So the good news there is that as we’ve seen a huge shift in fed policy and underlying interest rates over the last couple of years, we’ve seen listed res repriced downwards to reflect that.And you kind of reference that in your opening comments as we look forward.I think we’re pretty optimistic that assuming we are done in terms of uh fed rate hikes and higher rates listed reach today, our price for the interest rate environment that we have, which means they can do well.And just to give you a sense, you know, since the beginning of 2021 our sector is down roughly 20% on a total return basis at the same time, re cash flow per share has grown in the, in the mid teens cumulative on that on that time period.So it’s not an issue of fundamentals, it’s purely an issue of valuation which we think we’re getting towards the end of.And I would ask your opinion on the sort of relationship between rates and these stocks as well because even if the fed has done hiking, if rates are going to continue to sort of hover at these levels for a while, is that going to be problematic for the sector?Uh Yeah, absolutely.I think that there certainly has been a concern that with rates appearing to be set, you know, higher for longer, we came into this year with expectation of five or six rate cuts.Now we’re down to maybe basically zero.But if we have rates that are higher for longer with stickier inflation and a slowing growth backdrop, uh there have been some concerns raised that, you know, that is an ideal uh for, for real estate.So certainly that’s something that’s on investors’ minds.Um And, you know, we, we would point people to, you know, sectors where there’s clear demand, tail winds, you know, apartments, health care, uh data centers and stocks are names with uh pricing power, uh better than average earnings growth to alleviate some of those concerns.And Greg, I wanna bring you back here and actually go, go right there when you kind of lift the hood here, Greg.What parts of the market do you find attractive here?Right now?I is it housing health care data center office?I think all of those are attractive on a long term basis maybe with the, you know, potential exception of office, but even office at the right price can be interesting.And you’ve seen actually office stocks do really well, you know, I think to highlight a few that we really like at the moment, uh I would say some of the more specialty property types, something like self storage res where, you know, we think that uh we’re in the process of a bottoming out there on a fundamental basis.And that’s a really good long term business that we like uh with really low Capex Handel mentioned health care, you know, we also like that quite a bit.The the demographic story of kind of the 80 years and over demographic paints a really positive picture for demand for health care reps. At the same time, supply of assisted living and and senior housing.Uh it is is almost as low as it’s been in, in, you know, a decade.So that’s really good.And then, you know, the the third area I highlight is maybe more of a specialty situation.Um you know, at the right price, even something like malls can be interesting.So we, you know, one stock that we like in particular is Macerich, which trades at a very large discount to its only public tier in, in Simon.There’s a new management team at that company Malls is a business that we don’t think is particularly great long term, but we also think it’s not terrible if you own the best malls.And so that’s a specific situation where the public markets are giving you something at a really good price in our view.Um And maybe something else that is counterintuitive to a broader narrative is multifamily and gel.There you like a couple of stocks um in that subsector.Why, why multifamily, what and for for the late people, multi family is what we’d like to call apartment buildings where you have a lot of families living.What, why is that a good area to look right now?Sure.Sure.So, yeah, we’ve all lived in apartments at some point or another in our lives.But, uh, it’s a subsector that’s underperformed the last couple of years as, you know, the earnings growth of fundamentals.We’re slowing, we’re getting to the near the end of that.Actually, we’ve seen an inflection in the road ahead.There have been pockets of, you know, oversupply in certain regions, the sunbelt, in particular, Seattle certain markets around the country.So that concern is still out there, but there’s been really strong job growth this year.So the absorption of those excess units has been a bit better than feared.And so we think that with getting past the peak supply and we’re about to pass that either second or third quarter depending on which market you’re looking at plus the inflection uh with better rents and then eventually earnings growth in the road ahead and thinking about where the stocks are trading today at meaningful discounts that are long term averages to the private market values.And that’s by the way, is on trough revenue and trough earnings uh that the sector could be at the beginning of a multi year recovery and stepping back thinking about the alternatives in the marketplace, uh there is generally a shortage of housing in this country.Uh demographics uh certainly support uh an immigration uh demand for uh for, for housing, but thinking about the affordability of single family housing with the mortgage rates near 7%.So that’s an additional uh tail winner support for the renter ship side of the business.Greg bringing back in here, I’m interested internationally any opportunities, Greg, any spots China Europe or, or no, you’d rather stay here in the US.Yeah, I think there’s plenty of opportunity internationally in, in a couple of areas, you know, China is one that, that we’ve probably shied away from a little bit more in recent years.But you know, the opportunities are are a little bit different in Europe and Asia.So I think in Europe, you have stocks that trade at really interesting valuations, you maybe have less of the quality compounding growth stories there.Although they do exist to us, that’s a valuation story and, and that’s pretty interesting at the moment and then Asia is somewhat similar, it’s a bit a bit in between the US and Europe in terms of a mix of valuation and also really high quality kind of growth with within res.The biggest thing though, maybe to think about in those markets is just the overall maturity of the listed reed space in the US versus XU reeds have been around a lot longer in the US.It’s a lot more mature business than it has been outside the US.And if you think back to sort of the nineties and the, and the earlier part of the two thousands owning the stocks through that maturation process to where we are today in the US has been a really good experience for, for investors.We think the same thing can be said for X US uh in the decades ahead, Greg Handel.Thank you guys both so much for joining the show today.That was a great chat.Appreciate it.Thanks for having us.Thank you.