Advisors say REITs right as rates sink and stocks sell off

It’s been rough sledding for the S&P 500 in the past month. The benchmark index is down over 4 percent as questions about the strength of the economy have begun to rein in those rampaging bulls.

On the flip side, shares of the iShares US Real Estate ETF (Ticker: IYR) have jumped over 9 percent over the same period due to a precipitous move lower in interest rates and increasing calls for the Federal Reserve to begin the cutting process.

So is it finally time for financial advisors to “get real” and start buying REITs again?

Jeffrey Palma, head of multi-asset solutions at Cohen & Steers, says valuations have been challenged for real estate and listed infrastructure for the past few years. However, he believes that the bad news in this highly rate-sensitive sector is already priced into the stocks.

“When we think about slowing growth and higher interest rates, that's already reflected in valuations,” said Palma. “So for our longer term expectations that actually means that those real asset categories of the market look better relative to traditional markets where valuations are much higher.”

Andrew Graham, founder and portfolio manager at Jackson Square Capital, is maintaining a “cautiously constructive” outlook for REITs. It’s too early to be calling this the bottom of the market based on improved June property price data and the data-driven pullback in yields in his view, but "sentiment remains downbeat, which makes this an opportunity."

“Performance over the next few months will be driven by bond yields and another 40 basis-point decline in bond yields will be good for REITs in the near term,” said Graham, who owns a number of REITs in his ‘Income and Growth’ strategy that looks for sustainable dividend yields of more than 3 percent, dividend growth and fundamental upside.

Will Sterling, partner at TritonPoint Wealth, also describes himself as constructive on the asset class, saying that the cost of capital is declining, transaction activity is rising, values appear to be bottoming with consistent valuations over the last six months, and new construction is down. He says he will continue to deploy capital into private market real estate investments and may opportunistically add to public ones as well. 

“Subsectors will continue to matter – data centers remain attractive given the next five-year data center investment communicated by the five largest publicly traded hyperscalers, along with housing as there has been a persistent and sustained underinvestment and underbuilding of housing that has created a shortage,” said Sterling. 

Along similar lines, Nicholas Codola, senior portfolio manager at Brinker Capital Investments, continues to add to his overweight position relative to the market, taking gains from his commodities and natural resources allocations to fund it.

“We were early to the show, having added a position back in October of last year on the prospect of rate cuts and adding to the position earlier this year. But it is the top performing sector over the last three months, with utilities in second,” said Codola.

Codola adds that declining rates should help the industry as they can refinance debt at a cheaper rate. It may also boost commercial real estate, in his opinion, as the cost to refurbish and renovate properties should also decline.

Meanwhile, Matt Malone, head of investment management at Opto Investments, cautions against painting the REIT sector with a broad brush because commercial real estate is an enormous asset class and the sector contains a variety of different strategies and subsectors.

“Our outlook for real estate generally remains cautious, particularly in stabilized core portfolios - which most REITs specialize in holding - these assets give managers fewer options to add value in a more volatile market environment,” said Malone.

Added Malone: “In this environment, we are guiding clients to tactically deploy capital into real estate strategies that can take advantage of the ongoing dislocation in the debt markets, either by providing creative financing solutions or acquiring properties from distressed sellers.”

Finally, Edward Fernandez, president and CEO of 1031 Crowdfunding, is bullish on private and publicly registered, non-traded REITs. In his opinion, despite higher rates, real estate has sustained its value due to the lack of inventory, primarily because sellers don't want to part with their "trophy interest rates."

That said, he is not as positive on publicly traded REITS, which he says act more like equities than real estate investments and "will perform very similar to stocks," moving on interest rates and the news, and thereby increasing their volatility.