In the heart of Q4 earnings season, it is apparent that overall growth is stressed this quarter too. The slowing of the global economy, weakness in oil and other commodity prices, and the strengthening of the dollar against other currencies, are taking its toll on business activity.
While the broader Finance sector, of which the real estate investment trusts (REITs) are a part, has found a reason to rejoice for its 8% growth, yet the overall weakness in top line is palpable. (Read: Q4 Earnings Season: All Around Growth Challenges).
Importantly, though the Fed refrained from making any hike in rates at its recently concluded two-day meeting in January, but they kept the option open for the same in March. The recent bout of soft economic data, right from GDP numbers to the ISM manufacturing index, amid global worries have raised doubts about the probability of a March hike and any further raises in 2016.
That makes the ground favorable for the REITs for some more time, as their cost of debt would remain low. Moreover, for income investors, REITs appear good choices in this volatile environment because real estate usually generates steady and dependable cash flows.
And in this earnings season, with the majority of the REITs yet to report, we believe the time is apt to explore the industry fundamentals and the past-quarter performance to figure their chances of beating. Generally, an earnings beat serves as a catalyst, raising investors’ confidence in a stock, leading to rapid price appreciation.
REIT Fundamentals Remains Stable
A look at the fundamentals of REITs confirms stability and strength. A recent study by the commercial real estate services’ firm CBRE Group Inc. (CBG) shows healthy demand for U.S. commercial real estate in Q4, with a decrease in vacancy rates across property types like office, industrial and retail sectors amid steady absorption and comparatively limited supply.
Per the CBRE Group study, during Q4, the vacancy rate in the office sector declined 20 basis points (bps) sequentially to 13.2% while the industrial availability rate moved south by 20 bps to 9.4%. Moreover, the retail availability rate fell 10 bps to 11.2% while vacancy in the apartment sector was 4.6%.
Going by the demand-supply picture, the prospects of REITs look bright for the fourth-quarter earnings season. The time is thus ripe to build positions in stocks from this space.
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