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  • Writer's pictureRealFacts Editorial Team

RealFacts Weekly Real Estate Report

Updated: Apr 18

This Week's Topics

Is Now The Best Time In Our Lifetimes To Buy REITs?

Brad Thomas, Investing Group Leader at Seeking Alpha, suggests that now is the best time he has seen in his entire lifetime to be investing in REITs. He gives four explanations for this: “REITs Will Go On the Offensive”, “When Rates Pivot, REITs Rebound”, “Moderate Supply = Rent Growth”, and “A Margin of Safety”.

“REITs Will Go On the Offensive”: To his first point, Thomas suggests that after the Great Recession, “REITs acquired assets at premiums to NAVs which afforded them an attractive cost of capital,” and believes that this will be the same case in the coming years. As the economy rebounded, REITs became largely net sellers of assets. Thomas believes that in the next downturn, REITs will begin their buying sprees once more which will increase their earnings.

“When Rates Pivot, REITs Rebound”: According to research by Cohen & steers, Thomas also suggests that when the Fed ends rate hikes or begins cutting rates, REIT returns skyrocket. He adds the following data to prove his point:

12-month returns after pause

• Feb ’95 – June ’95 (Greenspan pivot): 19.8%

• Mar ’97 – Aug ’98 (Global currency crisis): 16.5%

• May ‘00 – Dec ’00 ( 18.9%

• Jun ’06 – Aug ’07 (pre-GFC): 30.2%

• Dec ’15 – Nov ’16 (China growth): 5.4%

• Dec ’18 – Jun ’19 (Mid cycle adjustment): 17.8%.

Source: Cohen & Steers.

Source: Cohen & Steers

Although it’s impossible to base future performance on past results, history is the best teacher and past trends combined with current market information is a winning team.

“Moderate Supply = Rent Growth”: Now, anyone with a basic understanding of economics knows that when there is limited supply and high demand, consumers are willing to pay a premium for the product. This is exactly what Thomas suggest for his third point. “"Pricing power" is the key to value creation and we’re seeing many property sectors that have been curtailed due to strict financial conditions,” he said. Below is a graph of new construction starts which furthers his point that demand will stay low.

Source: Cohen & Steers

Lastly, Thomas quotes Benjamin Graham in “The Intelligent Investor” when he explains that a margin of safety is a “favorable difference between price on the one hand and indicated or appraised value on the other.” He the pulls again from Cohen & Steers as they explain “valuations relative to the broader equity market are meaningfully below the historical median. Attractively priced equity and REITs’ access to the unsecured bond market could allow them to take advantage of external growth opportunities.”

Time will tell if this truly is the best time to invest in REITs, but history suggests it very well may be.

Source: Seeking Alpha

Hotel REITS Are Beginning To Look For New Acquisitions

Publicly traded hotel real estate investment trusts are eyeing new acquisitions amidst growing optimism about the market's trajectory. Some investors believe “the worst is behind them.” Thomas Fisher, Co-President and Chief Investment Officer at Pebblebrook Hotel Trust, commented, “2024 may be a transition year . . . This year, I think it’s probably transitioning to a lot of interest but building conviction and I think part of that is given the fact that investors think that the worst is behind them in terms of that cost and that they can actually underwrite assets . . . Overall . . . the market is getting better . . . it’s getting better from a financing front for cash-flowing yield assets with strong Sponsorship.”

According to Justin Knight, CEO, Apple Hospitality REIT acquired approximately $290 million in six hotels in 2023. They are acquiring more in 2024. “Our patience over the past several years has positioned us to be active in a market with limited competition where we can secure high- quality assets at pricing that meets our internal underwriting criteria.”

Jim Risoleo, President and CEO of Host Hotels & Resorts, stated, “Frankly, there just aren’t a lot of properties that are currently listed for sale. . . . So, we’re working very hard to find the right sorts of assets to add to the portfolio. The assets that we like are those that have diverse demand drivers. With a combination of group, business transient and leisure. … I believe and we believe as a team here at Host that under the assumption that the Fed is going to start loosening interest rates in the second half of this year, that that will spark sellers to bring properties to market and it’s going to also spark competition for those assets.”

A number of other Hotel REIT executives are basically expressing the same sentiment that they anticipate the market will get better in 2024 and beyond as interest rates are expected to adjust downward in the second half of the year. Mark Brugger, President and CEO, DiamondRock Hospitality Company expressed, “We are actively looking at things now, but we need to be sensitive to our cost of capital. We certainly have the dry powder and the balance sheet to do interesting deals and we would hope to find one or two transactions this year. Our opinion is the debt markets [will] continue to improve and that rates will be much lower next year than they are this year.”

In summary, hotel REITs, anticipating lower interest rates the second half of 2024 and even lower rates in 2025, are beginning to look for new acquisitions. With a tight market right now, hotel sellers may begin to put assets on the market as the demand for new acquisitions Increase.

Source: CoStar

Real Estate Isn’t a Nightmare Everywhere. 6 Stocks to Play.

While some real estate markets face challenges, others present promising opportunities for investors. Barron's highlights countries like India, Brazil, Mexico, and Dubai as markets with robust growth potential.

First on the list is India. With stricter regulation and a rising middle class, India’s is the polar opposite of China’s situation. India’s real estate market has stagnated for years but is now seeing a tremendous comeback. “In 2016, Narendra Modi’s government pushed through the Real Estate Reform Act, weeding out shady developers and bolstering consumer confidence through measures like escrow accounts for prepaid apartments,” the article said. This seems to have worked quite well as prices are rising at a steady 10% per year according to Rob Brewis, head of emerging markets at Aubrey Capital. Varun Lijawalla, emerging markets portfolio manager at Ninety-One, and Brewis both agree that Macrotech Developers (ticker: 543287.India) is a top pick. “They have very large landholdings on the outskirts of greater Mumbai, which will allow them to build at the affordable end of the spectrum,” said Brewis. He also recommends DLF (532868.India), which deals in the New Delhi metro area.

Brazil, Latin America's largest market, is also an opportunity zone. Rates have fallen 250 basis points to 11.25% with analysts expecting further cuts. Malcolm Dorson, head of emerging markets strategy at Global X exchange-traded funds believes they could get as low as 8%. With the revival of a subsidized low-income housing plan by President Luiz Inácio Lula da Silva, Laijawalla favors home builder Cyrela Brazil Realty (CYRBY).

Staying in Latin America, Mexico is another top pick by analysts. “Mexico is riding a wave of “nearshoring” investment from U.S. companies,” the article says. Analysts also predict rates to begin falling from historic highs of 11.25%. Laijawalla recommends Fibra Uno Administracion (FUNO11.Mexico), a REIT with heavy holdings in industrial parks.

Last but certainly not least is Dubai. This Middle Eastern hotspot saw apartment prices spike 12% in the past year according to Abhijit Kukreja, head of emerging markets equity sales at Auerbach Grayson. He predicts the market will only get hotter with demand outpacing supply by 40%. Kukreja suggests Emaar Properties (EMAAR.United Arab Emirates), a developer with a 30% market share as a top investment. Over the past year, the stock has risen 40% and he sees an additional 50% in upside. Tecom Group (TECOM.UAE) is another recommendation that leads in high-end office space.

There is always risk and volatility when investing, especially in international companies. However, for investors looking for exposure and diversification into international real estate, these stocks could be a great place to start.

Source: Barron’s

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