Real estate stocks extend losses as rates soar

Shares in real estate companies fell on Friday, adding to a massive sell-off the previous day, when bond yields jumped to their highest levels in 16 years after the Federal Reserve signaled that US interest rates would stay high for longer, reports Reuters.
The S&P 500 real estate index lost 0.7 per cent on Friday after falling 3.5 per cent on Thursday, which was its biggest daily decline since March when the banking sector was in crisis.
The US Treasury 10-year yield , fell slightly on Friday, after rising on Thursday to around 4.5 per cent, its highest since 2007. This provided tempting returns for fixed-income assets, making the relatively high dividend payouts of Real Estate Investment Trusts (REITs) a little less tempting.
REITs also tend to borrow heavily so the prospect of higher rates for longer puts pressure on their profit outlook. While the Fed decided not to hike interest rates after its meeting on Wednesday, it indicated that rates could stay at elevated levels for longer than investors had expected.
"Not only are REIT's bond substitutes but they also rely on borrowing so that just makes them doubly interest-rate-sensitive," said Jack Ablin, chief investment officer of Cresset Capital who says that even though the sector seems cheap by some measures, he is not ready to step in right now.
The S&P 500 real estate index is the second weakest performer among the benchmark S&P 500's 11 major sectors with a decline 6.5 per cent so far this year, second only to utilities' 10.3 per cent drop. This compares with year-to-date a gain of about 15 per cent for the benchmark index.
But Gina Szymanksi, portfolio manager for REITs at AEW Capital Management, said she expects Treasury yields will peak around current levels, which will help REIT stocks that have "already baked in" 10-year Treasury yields in this range.