Expectations for Interest Rate Cuts Intensify. Are There Investment Opportunities in REITs?
With Friday's nonfarm payroll data significantly lower than expected, the market has even started pricing in a 50bp rate cut in September. REITs, with their stable cash flows and high dividend yields, may soon enter an investment window of opportunity.
CBRE's report on July 31 shows that the most important indicator of the US real estate market, Cap Rate, is steadily recovering. The cap rate is an assessment of the yield of a property over one year, calculated by dividing a property's net operating income by its asset value.
Once the Federal Reserve begins cutting interest rates, the spread between real estate cap rates and Treasury yields is expected to widen further, potentially driving capital into REITs underpinned by real estate assets.
■ America's largest REIT benefits from the continued boom in logistics and warehousing
Industrial real estate remains one of the most prosperous sectors in the United States. CBRE's analyst Pol Marfa Miro said the supply response to this market normalization will play a crucial role in future performance. He said the vacancy rate has already peaked at around 5.6%.
As the largest REIT, PLD's shares decreased by 5.53% this year, pulling back its PE valuation from its highest point. Barclays raised the firm's price target on Prologis to $142 from $123 and kept an Overweight rating on the shares. Prologis reported Q2 results that the firm calls "better than feared," slightly ahead of the Street and matching the firm's estimates. Given the softer economic data and related moves in interest rates, analysts from Evercore raised its AFFO (Adjusted Funds from Operations) multiple for the core business, driving its higher price target.
■ Residential REITs remain one of the strongest property types
Residential REITs are also a category that investors focus on and represent the scarcest category among all types of real estate. Zumper’s latest report shows that the national rent index demonstrated the largest annual growth rates since July 2023. The price of one-bedrooms rose 1.7% to $1,531, while two-bedroom grew 2.6% to $1,911. AVB and EQR have increased by 14.24% and 17.22% respectively this year.
Several residential REITs have already released their Q2 earnings.
"We are pleased to report results that exceeded our expectations and to be seeing positive forward momentum in our business which led us to significantly improve our guidance," said Mark J. Parrell, Equity Residential's president and CEO. "Our portfolio continues to benefit from steady demand from our well-employed, higher earning renter demographic, elevated single family housing costs and manageable new apartment supply across most of our markets. We also continue to see positive customer satisfaction and employee engagement results. "
Following the quarterly results, Piper Sandler analyst Alexander Goldfarb has upgraded the price target for Equity Residential from $80 to $85, maintaining an Overweight rating on the stock.
AvalonBay's financial results also surpassed investors' expectation. Its same store residential revenue increased by 3.7%, benefiting from double-digit NOI growth in south California and Metro NY/NJ.
■ Data center demand is expected to remain strong thanks to AI
The July 23 report from Moody's Ratings forecasts that the appetite for data center capacity will sustain its strength over the coming five years. This trend is expected to benefit REITs such as Digital Realty Trust and Equinix by supporting the expansion of their portfolios and the preservation of essential credit indicators.
Strategic moves by these REITs, including the growing reliance on joint venture partnerships, securing tenants for facilities still under development, and yielding favorable returns on fresh investments, are anticipated to contribute to the stability of their existing credit ratios and robust liquidity positions.
Digital Realty's shares rose by 10.7%, and Equinix's shares fell by 1.6% this year.
Source: CBRE, Zumper
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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101605953 : verry good
10baggerbamm : if you believe rate cuts are coming, this is one of the last sectors that has not rallied. and if you like leverage then DRN is for you. within this portfolio consists the best real estate investment trust that you could possibly own.. where is it going in my opinion within a year I think we'll see 18 to 20. you can go back and read what I have been pounding the table on on this real estate investment trust for months now
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Paul Anthony : very helpful thanks
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Laine Ford : Okey no sell today no buy today