By Natalia Kniazhevich and Norah Mulinda
(Bloomberg) —
As Wall Street gears up for Federal Reserve
interest-rate cuts as early as September, some traders are
already piling into beaten-down real estate companies — driving
one stock’s returns above technology giant Nvidia Corp. so far
in August.
After lagging the broader market for months, the S&P 500
Real Estate Sector is finally turning a corner, gaining 18% from
its April low and outperforming the S&P 500. That optimism is
shared by hedge funds, who flipped from selling the sector
earlier in the summer to buying it now. They net bought real
estate stocks at the fastest pace in four months in the week
through Aug. 16, according to Goldman Sachs’s prime brokerage
data, with sub-groups like specialized REITs and health care
REITs seeing the biggest buying.
“It’s a part of the ongoing rotation, where managers are
moving to the ‘older’ economy and stocks that are not so
overvalued” said Jonathan Caplis, chief executive officer at
PivotalPath, a hedge fund research firm.
That rotation reflects traders’ willingness to finally
endorse companies whose reputations are largely associated with
their dependency on debt financing and sensitivity to rates.
While certain corners of the real estate market are more
leveraged than others, the group more broadly is overwhelmingly
vulnerable to the rise and fall of borrowing costs.
Swaps traders are currently pricing in at least one 25
basis-point cut at the policymakers’ next gathering in
September.
“The value of REIT equities are tied to the underlying
value of their real estate assets and often trade relative to
the net asset value of these assets,” said Walter Todd,
president and chief investment officer of Greenwood Capital
Associates. He invests in industrials REITs and owns First
Industrial Realty Trust, Inc., data center REITs and multifamily
developers like Mid-America Apartment Communities Inc.
“As rates come down, investors ascribe a higher value to
the real estate assets, which causes the equity value of the
REIT stocks to move higher,” Todd added.
Some of the group’s names are already staging an impressive
run. Take Public Storage, a California-based REITS firm that
manages self-storage facilities. Despite posting disappointing
earnings in late July, it’s gained 11% so far in August,
compared with Nvidia’s 9.8% rally during that time. Investors
bet that lower intererest rates will increase demand for home
buying, leading to higher demand for storage facilities.
“People are buying stocks like Public Storage not because
of near-term fundamentals, but more on expectations that lower
interest rates will increase demand for storage due to an
improved home-sale market” said Eric Wolfe, director at Citi
Research.
While the multifamily housing market has been oversupplied
for some time, that could shift when borrowing costs start to
decline. Expectations of a tighter market are already pushing
some stocks higher. Shares of Mid-America Apartment Communities,
Inc., a real estate investment trust which owns, develops and
operates multifamily apartment communities, are up 9% since the
end of July.
Homebuilding stocks are in focus too. Shares of Toll
Brothers Inc., a luxury homebuilder which reported better-than-
expected third-quarter results Tuesday, are up 37% this year,
more than twice the performance of the S&P 500. And data center
REITs are expected to benefit from the artificial intelligence-
driven demand for enterprise data centers.
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