Chart of the Week - REITs are turning the corner
REITs are rising on a rate cut rocket…
But has anything really changed?
And what about risks for CRE?
The setup for REITs:
-REITs have put in a head and shoulders bottoming pattern.
-Global REIT breadth has surged from washed out oversold levels.
-Sentiment is turning up from record pessimism (contrarian bullish).
-Positioning is extremely light among retail (ETF market implied allocations record low) and institutional investors (surveys show major underweights to REITs).
-The relative performance line for REITs vs stocks is turning up after an extreme downside deviation from mean/trend (expect eventual upside trend reversion).
-REIT relative valuations vs the $S&P 500(.SPX)$ are ticking up from extreme cheap levels.
-Absolute valuations are ticking up after briefly revisiting the 2020 lows last year.
-REIT sector financials have held up decent all things considered (interest coverage in line with historical averages, ROA/ROE rebounding from cyclical lows).
-The reset in CRE and REIT prices has already been significant in price and time (n.b. not every downturn has to be 2008, which was highly unusual).
-Previous rising rate headwinds are fading as bond yields and Fed rates have peaked for now.
As for the risks, the key downside risks are found on the edges — either a sharp resurgence in inflation and another big spike in bond yields (which seems unlikely at this point) — or a plunge into a default cycle inducing recession where falling rate tailwinds are offset by credit crunches, tenant stress, and damage to investor confidence. Knocking on wood, that also seems unlikely in the immediate term (no clear evidence of that just yet).
Shorter-term, REITs might sell-off if Fed rate cut plans either fail to materialize, or fail to come fast and meaty enough to satisfy market appetite. But given the wider setup for REITs that would likely be one of those buy-the-dip situations.
So given the starting point of a significant improvement in market technicals, turn up in sentiment and positioning from contrarian levels, major reset in price and valuations, and now fading rate headwinds — this may well be the start of a new longer-term bull market for REITs.
REITs are also well setup as a rotation candidate, and any investor disillusionment with extreme expensive tech stocks (which have already baked in very high expectations) could trigger rotation flows to rate cut beneficiaries like REITs.
So definitely keep REITs on the radar.
Key point: REITs are turning the corner (in a good way).
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https://x.com/Callum_Thomas/status/1830735046933967331
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