Global real estate achieved a significant rally in November, marking a 10.4% increase, the fourth-best monthly performance since the Global Financial Crisis, driven by a notable compression in US 10-year bond yields.
UBS analysts consider improving bond prices a major tailwind for real estate investment trusts (REITs), linking positive pricing trends to historical correlations with bond yields.
Given that UBS anticipates further reductions in US 10-year bond yields to 3.6% by the end of 2024, REITs are shaping up to be a hot asset class in the year ahead.
UBS's analysis of the past five instances of Federal Reserve rate cuts reveals a pattern: the real estate sector often begins rallying 18 to 24 weeks prior to the anticipated cuts.
This aligns with anticipation of the first Fed rate cut coming in next March.
Current market trends align with historical precedents, suggesting a well-grounded optimism in the sector.
UBS’s latest investor survey reflects this sentiment, with over half of investors expecting real estate investment trusts to significantly outperform broader equities.
There is therefore a strong case to be made to buy REITs while they’re still cheap, though not all ratios are as enticing as each other.
While the sector is trading below the historical average on a price-to-NAV basis, it appears more expensive relative to EBITDA/EV.
Top real estate picks for UBS include British Land and Segro in the UK, Sun Communities and Prologis in the US, Aedifica and Merlin and Shurgard in Europe.