With interest rates expected to fall in 2024, real estate, a popular sector for its stable income payments, could be on the upswing in the new year. The real estate sector of the S&P 500 Index ended 2023 with gains of more than 8%, well below the 24% gain for the broader market index. Rising interest rates are a drag on this market segment, not only by raising borrowing costs for real estate investment trusts, but also by making the assets less attractive to income-seeking investors compared to, say, U.S. Treasuries. Remember, last year investors could earn returns of 5% or more just by putting their money into certificates of deposit or stashing it in money market funds or Treasury bills. The Federal Reserve’s decision to cut interest rates three times in 2024 could increase investor interest in REITs, which could boost their stock prices as well as their earnings. “I think REIT prices will go up once interest rates stabilize. People will come back to the sector,” said Morningstar analyst Kevin Brown. “When interest rates are low, many income-oriented investors find REIT dividends very attractive and are willing to take on the risk associated with investing in stocks in order to receive this dividend.” In fact, The top sector in Q4 2023 was real estate, up 17.6%, ending the month with a nearly 8% increase in December alone. The move coincided with a sharp cooling in the 10-year Treasury yield, which peaked in October at more than 5% and ended the year at just over 3.8%. A keen eye The post-COVID-19 work-from-home trend and delayed return to work are holding back office REITs. Castle Systems’ Return to Work Barometer, which measures office occupancy in 10 major U.S. cities, stood at 51.1% as of Dec. 18, down from 51.6% the previous week. Office REITs will still face challenges in 2024, but the situation is expected to improve, Jefferies said. “While we are hopeful, [occupancy] “While we saw declines in about half of our coverage in 2024, we expect the pace of declines to slow, which should provide tailwinds to sentiment,” analyst Peter Abramowitz said in a note Monday. ” he said. BXP 1Y Mountain Boston Properties’ Past 12 Month Performance “Due to our industry leadership position and one of the highest quality properties, BXP has a Boston Properties benefits from a “modern portfolio” in the coastal office REIT industry, with an overall weighted average building age of 22.7 years. 15.7 years. “Public REITs should result in more stable occupancy prospects,” Jefferies said. Jefferies’ $80 price target reflects a 14% upside from Friday’s closing price. The stock’s yield is 5.4. %. 13 out of 21 analysts covering Boston Properties rate it.” According to LSEG (formerly Refinitiv), the expected price is Hold, and the consensus price target assumes a downside of about 5% from here. Identifying long-term trends While the low interest rate environment is beneficial for his REIT, Morningstar’s Brown believes that one sector, senior housing and health care, will be boosted in the long term by new demographic trends. I think there is a high possibility that this will happen. According to the National Elderly Housing and Care Investment Center, the occupancy rate of senior housing in the third quarter of 2023 was 84.4%. This is more than six percentage points higher than the pre-pandemic low of 77.8%, but still below the pre-pandemic occupancy rate of 87.1%. At the same time, the baby boomer generation is rapidly aging, with the oldest baby boomer reaching 80 years old in 2026. “That translates into demand for these facilities,” Brown said. He expects demand to outstrip supply over the next three to four years, “which will bring occupancy back to pre-pandemic levels and perhaps even beyond that into the 90% range.” To capitalize on that trend, Brown highlighted Welltower and Ventus. “I think we’re going to see strong growth for many years to come.” Welltower, which invests in senior housing companies, has a dividend yield of 2.7%, and Ventas has a dividend yield of 3.6%. J.P. Morgan’s Anthony Paolone raised Welltower’s rating from neutral to overweight in December, saying Welltower had “a large number of acquisitions, including $3 billion completed by October and another $3 billion in progress.” “The pace of activity has improved significantly,” he said. He also raised his price target for the end of 2024 to $99 from $92, suggesting a potential upside of nearly 10% from Friday’s closing price. According to LSEG, 12 of the 18 analysts covering Welltower rate it a “buy” or “strong buy,” with a consensus price target of more than 3% upside from current levels. It suggests. Ventas has a buy or strong buy rating from 60% of analysts covering the stock, with an average price target suggesting an upside of 2% from here. Dividend Aristocrats to Watch For 2024, Morningstar’s Brown likes his Realty Income, a triple-net lease REIT. In a triple net lease agreement, the tenant is responsible for maintenance, rent, property taxes, and insurance. Brown noted that Realty Income’s tenants also include pharmacies and gas stations, adding, “They just collect the rent checks from the tenants, and otherwise everything else about the property is handled by the tenants.” It will be a burden on the public.” The dividend yield on real estate income is 5.3%. It is also a member of the S&P 500 Dividend Aristocrats, a stock that has increased its dividend for the past 25 consecutive years. “They’re a stable rent collection company, and if we’re in a potential economic slowdown or recession, that’s a good thing,” Brown said. According to LSEG, nearly half of analysts covering real estate income rate it a buy or strong buy and expect an increase of 5% or more. —CNBC’s Michael Bloom and Chris Hayes contributed reporting.
This income-producing asset could appreciate in 2024
