Real estate euphoria highlights trader angst for end to hikes

01 December 2023

(Bloomberg) -- Real estate finished November as the second best performing group in the S&P 500 Index adding 12%, trailing slightly behind tech's 13% gain. The momentum was fueled by bets the central bank may begin cutting rates as early as next year.

In November, the interest-rate sensitive sector was a market outperformer as investors poured capital into the group. A pullback in Treasury yields has also supported trader optimism that the worst of it could be over. Additionally, US real estate investment trusts, which have been beaten-down by surging interest rates and economic uncertainty, are now flashing signs of strength.

The group rallied 12% in November versus the S&P 500's 9% gain, notching its best month since 2011. Bank of America said it's overweight the real estate sector ahead of 2024, with Jeffrey Spector calling the REIT sector equity's "diamond in the rough." He listed American Homes 4 Rent, Americold Realty Trust, Empire State Realty Trust, Kimco Realty Corp., Prologis Inc. and Welltower Inc. as his top picks in a note to clients Friday.

Battered office landlord stocks have placed a overcast on the REIT sector as a whole, though office only represents a sliver of the group. Investors have been fleeing the office sector as fears of remote work and elevated borrowing costs destabilize the sector.

"Real estate has seen the biggest de-rating since 2021 among all industries on concerns over office, but office is less than 5% of real estate's market cap," he said.

While Bank of America remains cautious on the market entering 2024, it still sees real estate as underappreciated.

For homebuilding stocks, the bulk of the monthly advance was made during the first three sessions of November after the Federal Reserve announced it would...