Real Estate Not Doing Real Well

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What's going on?

In the wake of last week’s US interest rate hike, real estate stocks have been somewhat out of favor with investors. They’re down by 4% this year, while the rest of the market’s up 4%, on average.

What does this mean?

Compared to tech stocks (that may not generate any profit at all), investors typically see real estate stocks as reasonably stable investments. Companies that own properties tend to have regular cash coming in via long-term rental income, letting investors feast their eyes on future cash payouts (a.k.a. dividends).

However, with the latest interest rate hike – and two more forecast for later in the year – the returns that investors are likely to get on investments generally considered low risk (like savings accounts and new government bonds) are rising. This can make them relatively more attractive because their returns are potentially more competitive against real estate stocks’ dividend yields (i.e. the dividend amount as a percentage of the stock’s value).

Why should I care?

For markets: Other “dividend” stocks are losing popularity, too.

Investors have been selling shares in other sectors with similar characteristics, like utilities. Regardless of the state of the economy, people still need essentials like electricity. This helps these companies raise their prices regularly, generating predictable flows of cash. But instead of these ol’ faithfuls, investors are buying riskier stocks like banks, which tend to benefit when interest rates rise.

The bigger picture: Choppy water in the UK real estate market.

Retailers are closing stores left and right, which might be why shopping center owner Hammerson abandoned a $4.5 billion takeover of rival Intu in April – and why property company St Modwen is hoping to sell more than a quarter of its shopping center portfolio. On the residential side, house prices aren’t looking much better. Growth is slower than last year – and there are more properties available for sale than this time last year, too.

Originally posted as part of the Finimize daily email.

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