REITs rebound: Expectations of interest rate cuts are driving optimism in the real estate market, with commercial property stocks and bonds experiencing a surge. Real estate investment trusts (REITs) have rebounded to pre-collapse levels of Silicon Valley Bank in March 2023, alleviating concerns of a credit crunch for landlords. Commercial property bonds are also reflecting optimism as investments in property funds increase.

The rally is fuelled by the anticipation of major central banks cutting interest rates from multi-decade highs, easing pressure on landlords and lenders and halting the decline in building values. Fidelity International's Kim Politzer believes the market is nearing the bottom, encouraging plans to invest more in real estate.

Market sentiment shift

Despite warnings from regulators, including Germany's financial regulator president, calling commercial real estate 'risk No 1' there's a notable positive shift in market sentiment. UBS Asset Management's Bernie Ahkong highlights a change in attitude towards real estate but remains cautious.

While the rally seems promising, major challenges persist. Commercial landlords globally face over $2 trillion in loan refinancing by the end of 2025. Ratings agency S&P Global has put a significant portion of real estate groups on notice for potential debt downgrades if interest rates remain high.

Despite a dip in commercial property transactions and elevated office vacancies, there are signs of improvement. Anne Koeman-Sharapova, head of real estate investment for Europe at Mercer, notes a moderation in the decline of real estate values, though it's not considered a bull market.

Global real estate divergence

Recovery is expected to be uneven, with Europe favoured over the United States. Capital Economics predicts a 1.1 per cent increase in UK commercial building values in 2024, while the Eurozone is expected to see positive trends in 2025. The US may experience a 10 per cent drop in 2024, with no recovery until 2026, attributed to a sharp office demand slump.

Even with the Fed's aggressive rate rise cycle, US credit investors are turning optimistic, indicated by an index of bonds issued by US REITs returning to pre-2022 levels. Bank of America's Yuri Seliger highlights that the outlook for US real estate is improving as the Fed's rate hikes are expected to end in 2024.

(With Reuters Inputs)