Falling Rates: A Blessing for Real Estate Stocks?

In what may come to be seen as an historic Jackson Hole Symposium press conference, the chairman of the US Federal Reserve signalled at the end of August that three years of high US interest rates were coming to an end.

Speaking during the annual meeting of central bankers and policymakers, Jay Powell said “the time has come for policy to adjust,”¹ indicating that he was ready to cut US interest rates.

That matters because US interest rates are the most influential worldwide: financial markets duly responded positively. In particular, though, it’s worth considering the likely benefits for real estate companies, which have much to gain from declining rates as they tend to take on significant borrowings to finance both investment and development.

Taking its cue from chairman Powell’s statement, our VanEck Global Real Estate UCITS ETF rose by about 1% in price on the following day. As it tracks the share price performance of the 100 most liquid real estate stocks worldwide—with 40 in the Americas and the rest equally split between Europe and Asia—this is a good proxy for the reaction of real estate stocks globally. Please keep in mind the foreign currency risk, equity market risk, industry or sector concentration risk, interest rate risk. And do not forget to refer to the KID and the Prospectus for other important information before investing.

Democratizing property investing

Our real estate ETF is one of the oldest in Europe, launched in 2011, and was one of the first ETFs we set up. We did so because we wanted to give retail investors a way to gain an exposure to real estate, which is generally an asset class that’s only available to affluent investors. By contrast, you can invest in this ETF with just a few euros.

In many ways, it was ahead of its time. Think of it if you like as being similar to tokenizing real estate.

Over the decade or more that the ETF has been trading, it has delivered an annualized return of 7.54% to investors (as at 31 August 2024)². However, there have been periods when returns have been higher than this and times when they have been lower. Typically, the better periods have been associated with low interest rates and the less good have occurred when the price of money has been high.

The effect of falling rates

But financial markets are already discounting cuts by the Federal Reserve and other central banks, so what’s to say that real estate stocks haven’t already had their rally and will move sideways from here? After all, over the past 12 months the ETF has climbed by 19.53%³ (again to 31 August), which is far higher than its average return. The ETF performed well not just in absolute numbers but also in comparison to its peer group, consistently landing in the top quartile over the last 1, 3, 5 and 10 years.

We examined all periods of major rate cuts during the last 50 years⁴ and our analysis suggests that, in fact, real estate stocks tend to perform well for several years after central banks start cutting interest rates in reaction to a slowing economy, which is what the economic data suggests today. In these cases, real estate stocks as measured by the FTSE Nareit All Equity REIT Index have typically risen by 50% to 100% or more from their lows.

For instance, the two graphs below show how the FTSE Nareit All Equity REIT Index responded to US rate cuts in two periods: the Gulf War recession of the early 1990s and the 2008-2009 Global Financial Crisis.

Gulf War Recession

Source: Bloomberg.

Global Financial Crisis

Source: Bloomberg.

Will history repeat itself?

Returning to the present day, though, the fundamentals of real estate appear strong. Occupancy is generally across all sectors of real estate, with the minor exception of old-fashioned office space.

Yet after several years of high interest rates creating headwinds for real estate in the United States, most of Europe and the UK, times appear to be changing. Of course, it’s still hard to predict how far rates will fall and how fast. But if history is anything to go by, the real estate sector may be set for one of its periods of healthy gains.