As shares in property investment trusts continue to endure wide discounts to their net asset value, broker Numis said if interest rates are at or near their peak then the sector offers "selective value".
The discounts average around 32% across the sector, with as low as 6% up to 58% at the top. Meanwhile, the sector dividend yield is around 7.5%.
"In part, we believe this reflects uncertainty over the potential impact of further capital value declines and higher financing costs on near-term returns [in other words both NAV and dividends]," analysts said in a note on Wednesday that examined the potential impact of higher debt costs on near-term earnings.
Further NAV declines cannot be ruled out, but the analysts believe any further declines will be relatively modest for most of the trusts they cover.
Over the past 12 months, several funds have reduced floating rate debt exposure through interest rate swaps and caps, with has sometimes been at significant cost, but the result is that the sector has limited exposure to the risk that inflationary shocks necessitate further base rate increases.
"Gearing levels are generally manageable, and those which undertake active management of portfolios and balance sheets should continue to deliver stable earnings," the analysts added.
If debt costs do rise, the majority of funds should still be able to continue covering current dividend targets.
"Assuming interest rates are close to their peak, we believe the sector offers selective value although we acknowledge that sustained dividend growth in the near term will be limited to those funds that can drive meaningful top-line rent," the analysts said.
As such, the team favours funds with conservative balance sheets that are being proactively managed for the current environment, which they believe "will be rewarded when sentiment to the sector improves".
UK Commercial Property REIT (LSE:UKCM) was highlighted as being "well-placed", while ratings of diversified peers such as Custodian Property Income REIT PLC (LSE:CREI) and Schroder Real Estate Investment Trust (LSE:SREI) also look "undemanding" given their defensive balance sheet positioning.