The BCA says investors should complete a real estate meeting through Investing.com
Investing.com — BCA Research told investors in a recent note to take a cautious approach to the recent rally in the real estate sector, which has been the best-performing sector in , with distressed sectors such as Office REIT leading the way.
However, BCA analysts warn that this momentum may not last.
While real estate equity yields appear attractive amid falling interest rates, BCA says several challenges could impact the sector.
“REITs will struggle if economic growth slows despite rate cuts,” the paper explained.
The BCA explains that historically, REITs tend to perform best just before the first rate cut but consolidate gains soon after, a pattern investors should consider.
Basically, BCA says the outlook for real estate is mixed. Although balance sheets remain healthy, the company points out that “operating income is declining” and margins have returned to pre-pandemic levels.
Additionally, pandemic-related disruptions are said to have created pockets of stress in the sector, which are now on the rise.
The BCA recommends that investors be underweight in certain sub-sectors, including Industrial REITs, which are facing pressure from declining manufacturing and slow online retail sales, and Residential REITs, dominated by multi-family units facing overconstruction, slow rent growth, and rising criminals.
BCA adds that the Office REITs sub-sector is also facing problems due to high vacancy rates and an increase in distressed loans.
The research firm suggests an overweight position in Specialized REITs, which provide exposure to the digital economy.
“Underweight Real Estate over investment property,” says BCA. he advises to maintain an underweight position on real estate in the near term, expecting economic growth to slow down. We expect economic growth to slow, and even low interest rates will not benefit the sector under such conditions. In addition, delinquency rates are rising and increasing in all sub-sections, which does not reflect well on the functioning of the sector.”
