Real estate stocks are showing signs of recovery, and Janus Henderson says the new cycle should last several years. CBRE’s U.S. real estate transaction volume appears to have increased for the first time in more than two years, according to a Nov. 11 report from Janus portfolio managers Greg Kuhl and Danny Greenberger. They noted that CBRE is the world’s largest real estate brokerage and a leader in the corporate real estate sector. Additionally, CBRE reported a 20% increase in revenue from U.S. investment sales. Kuhl said an increase in trading is usually a good sign of an inflection point in a cycle. “A recovery in trading…provides multiple avenues for[real estate investment trusts]to drive earnings growth, strengthen asset value prospects, and ultimately increase the likelihood of share price appreciation and dividend increases in the new cycle.” ,” the report states. Kuhl said in an interview with CNBC that the main issue in real estate over the past few years has been valuations, as publicly traded REITs will be reset to higher interest rates in 2022. REITs are starting to perform well this year, even though the 10-year Treasury yield remains above 4%. The FTSE NAREIT Equity REITS Index, which tracks U.S. commercial real estate and is the benchmark used by Janus for its U.S. Real Estate ETF (JRE), is up about 14% year-to-date and has a dividend yield of 3.59%. JRE YTD Mountain Janus Henderson US Real Estate ETF “What you’re seeing is the market turning positive and saying, ‘Look, we’re starting a real estate cycle,'” Kuhl said. “Many investors are becoming more confident that the bottom is near and can now focus on the fundamentals. That’s fine, and it should lead to some decent year-on-year growth,” he added. “Then if we have a scenario where rates come down a little bit, it’s going to get even better and even more upside.” Another factor to keep in mind is that real estate cycles last about seven to 10 years. he pointed out. “If you look at the last few cycles, the first five years of that cycle were just great conditions for REITs,” Kuhl said. “The whole cycle is good, but the beginning of the cycle is the best time to look at it in terms of relative performance compared to other types of real estate ownership.” Finding the Opportunity The biggest opportunity within this sector right now is for seniors. in a residential REIT, Kuhl said. First, people are living longer and aging. “The growth in the number of people over 80 years of age continues to increase meaningfully throughout the rest of the decade,” he said. Additionally, there is the issue of supply. Kuhl explained that the high interest rate environment of recent years has prevented companies from borrowing money to construct new buildings, resulting in little growth in the overall supply of real estate. Senior housing is an extreme example. “There is literally almost nothing being built in this country right now,” Kuhl said. “At the same time, there are huge tailwinds of demand that we can see happening and can continue to happen. That’s a really good story.”Furthermore, once the building plans are complete, the land is still being purchased. It will still take time to go through the process of carrying out all planning, permitting and construction, he added. He said it would be a process of at least three years. “That means we’re nearing the end of the decade before we start to see supply again in most property types,” he noted. Another good subsector right now is data center REITs, Kuhl said. This is a demand story, as a large amount of supply is currently being built to accommodate the artificial intelligence boom. “If we could build a data center with electricity in most markets around the country, we would lease it,” he said. However, he added that investors should choose carefully as some stocks are already well valued. Kuhl also sees a small opportunity in industrial, office and mall-centered real estate. For example, office REITs are only a small part of Janus’ portfolio, but he said the sector’s sell-off has created some opportunities. “Stock prices have fallen significantly and we can see that the fundamentals are no longer deteriorating in some markets, so occupancy is stabilizing,” Kuhl said. For example, New York is “by far” the best market, but the West Coast isn’t showing signs of a similar recovery, he said. Industrial REITs also performed poorly this year due to slowing demand and increasing supply. However, supply growth has peaked and the economy is on track to decline into next year, he said. “The issue is demand,” Kuhl said. “If demand stays the same or recovers a bit, I think the industrial sector will be an interesting story heading into 2025,” he added. “It’s a bargain compared to its historical performance, and we may see fundamentals improve as the year progresses.”
Janus Henderson sees opportunity in real estate stock recovery
