Last year set a low bar for real estate. Interest rates dragged down buyers' budgets and caused property values and share prices to slump. But the FTSE 350 Real Estate index ended with some momentum in Q4 thanks to falling inflation and hopes that the Bank of England will soon turn its attention from rate hikes to rate cuts.
That momentum means the prospects for the next 12 months look better. Few listed stocks are more sensitive to interest rates than real estate equities, so few stand to benefit more if the prevailing dovish mood continues. But that doesn't mean all Reits trading at a discount are a bargain. For some, we believe there are further devaluations to come. For others, there is an opportunity to buy in. The subsectors on which we are most bullish are warehouses, rental property, and student accommodation, which benefit from rising asset values and rents due to demand driven by non-cyclical factors like the continued rise of online shopping and student immigration. Segro (SGRO), Grainger (GRI), and Unite (UTG) are our picks in this regard.
We are more bearish on office assets because there is still uncertainty over the extent of the role they will play in the post-Covid working world. Last year, the asset class lost more value than warehouses or retail buildings, and the devaluation is not yet slowing down, even with interest rates stabilising.