Investing.com — BCA Research told investors in a recent note to take a cautious approach to the real estate sector’s recent rally. The real estate sector has been the best performing sector, led by distressed sectors such as office REITs.
However, BCA analysts warn that this momentum may not be sustainable.
While real estate dividend yields look attractive amid falling interest rates, BCA says there are several challenges that could impact the sector.
“If economic growth slows despite interest rate cuts, REITs will struggle,” the note said.
BCA explains that historically REITs tend to outperform just before the first rate cut, but then consolidate gains quickly afterward, a pattern investors should consider.
Essentially, BCA says the outlook for real estate is mixed. Although its balance sheet remains strong, the company notes that “net operating income has decelerated” and margins have only returned to pre-pandemic levels.
Additionally, disruptions related to the pandemic are said to have caused hardship within the industry, which is now increasing in scale.
BCA advises investors in industrial REITs, which are facing pressure from a manufacturing downturn and sluggish online retail sales, and multifamily housing, which is dominated by overbuilding, slowing rent growth and rising delinquencies. We recommend that investors be underweight in certain subsectors, such as residential REITs.
BCA added that the office REIT subsector is also facing headwinds due to rising vacancy rates and an increase in non-performing loans.
The research firm suggests an overweight position in specialized REITs that provide exposure to the digital economy.
BCA says it is “underweight real estate for strategic investment horizons.” He expects economic growth to slow and advises maintaining an underweight stance on real estate in the short term. We expect economic growth to be on the downside, and in such circumstances lower interest rates will not benefit the sector. Additionally, delinquency rates are rising and widening across subsectors, which does not bode well for the sector’s performance. ”
