Real estate stocks could extend their rally, assuming the Fed makes its first interest rate cut in four years. However, the size of the rate cut matters, according to one portfolio manager.
“The market will respond more favorably to a larger cut, and we could see real estate stocks rally in a bigger way than if there is a 25 bps rate cut,” Todd Kellenberger, Principal Asset Management’s REIT client portfolio manager, told Yahoo Finance in an email.
Ahead of the Fed’s policy decision announcement, investors were placing the probability of a 50-point cut at 59%, according to CME’s FedWatch tool.
The Real Estate Select Sector SPDR Fund (XLRE) — whose top holdings include REITs like Prologis (PLD) and American Tower (AMT) — is up 17% this quarter. This is a surprising turnaround from the start of this year, as the sector suffered from elevated borrowing costs. Mortgage rates have moved lower since then.
Kellenberger remains bullish on the landscape for REITs once the path for the Fed’s plan becomes even clearer.
“We believe the more important thing to watch is the Fed’s commitment to future rate cuts,” Kellenberger added. “A strong commitment to cutting rates in the future will be important to sustain a rally in REIT stocks in the near term. Market sentiment will likely favor interest rate-sensitive areas of the market like REITs.”
