In the wake of a significant decline in the real estate market, UBS analysts believe that there is a unique opportunity for long-term investors. With real estate being the only one of the 11 main groups in the S & P 500 to have fallen in 2024, down by 4.7%, there is certainly cause for concern. Despite this, UBS analyst Jonathan Woloshin highlights that there is hope for the future.
Uncertainties loom over the commercial real estate (CRE) market, with questions surrounding interest rates and the refinancing of $2 trillion in debt maturing between 2024 and 2026. However, Woloshin suggests that there is still capital available, and the decreasing supply of new retail, multifamily, and industrial real estate could indicate stronger operating fundamentals in the coming years.
While the headlines may remain negative and challenges persist in the CRE market, Woloshin believes that patient investors with liquidity and a multi-year time horizon could find attractive risk-adjusted reward opportunities. It is essential for investors to focus on quality, such as management, balance sheet strength, property locations, and dividend-to-free cash flow coverage, rather than solely reaching for high yields.
Among the recommended investments, Prologis stands out as the world’s largest owner of industrial properties, particularly warehouses. Despite a 15% decline in shares this year, Prologis offers a four-prong operating model that provides various avenues for value creation. Additionally, the REIT pays a 3.4% dividend yield.
Another recommended REIT is Alexandria Real Estate Equities, which yields 4.4% and specializes in owning, operating, and developing large campuses for life science companies. While the company has seen a more than 7% decrease in its share value this year, Woloshin praises Alexandria Real Estate Equities for its strong balance sheet, limited near-term debt, well-covered dividend, and extensive access to capital.
The current state of the real estate market may seem uncertain and challenging, but this could present a promising opportunity for long-term investors. By carefully evaluating the quality of investments and focusing on factors beyond high yields, investors may be able to discover lucrative prospects in the CRE and REIT market. With the right approach and a patient outlook, there is a potential for attractive risk-adjusted rewards in the real estate sector.