Real estate stocks decline as markets price in reduced hopes of near-term rate cut

The Real Estate Select Sector SPDR Fund ETF (NYSEARCA:XLRE), which tracks the S&P 500 real estate stocks, fell ~3% this week as the markets priced in reduced hopes of a near-term rate cut.

The Dow Jones Equity All REIT Total Return Index was down by 3.11%, while FTSE Nareit All Equity REITs declined by 3.20%.

Federal Reserve Chair Jerome Powell repeated on Wednesday that he doesn’t expect it will be appropriate to lower the policy rate until they have greater confidence that inflation is moving sustainably down toward 2%.

Meanwhile, Fed Governor Michelle Bowman said on Friday that it is possible the U.S. central bank may have to raise interest rates further.

Citi Research analysts rated the real estate sector as market weight, noting that the valuation indicators are compelling, but the fundamental set up continues to face challenges in 2024.

On a similar note, the broader S&P 500 suffered its worst week of 2024, having posted losses in three out of five sessions.

Separately, a federal appeals court ruled that the U.S. Department of Justice can reopen its antitrust investigation into the policies of the National Association of Realtors, prohibiting the real estate trade group from enforcing a 2020 settlement to close the case. The proposed settlement sought to boost transparency about broker commissions, among several other requirements for the NAR.

The S&P 500 Real Estate Management & Development subsector, which has largely remained a gainer throughout the year, retreated by 1.59% this week.

Office REITs were the biggest losers, having lost 4.22% of their total value. Industrial REITs followed with a decline of 4.21%.

Boston Properties (BXP), Kimco Realty (KIM) and Equinix (EQIX) were the notable S&P 500 laggards. Kimco was downgraded on the basis of less accretion from its acquisition of RPT Realty. Power REIT (PW) and Sachem Capital (SACH) were other major real estate losers.

XLRE saw net outflows of $41.73M this week, compared to inflows of $7.32M last week, according to the data solutions provider VettaFi.

Seeking Alpha’s Quant Rating system changed its rating on the fund to Sell from Hold, with a focus on momentum. The rating system downgraded Invitation Homes (INVH) and UDR (UDR), but upgraded Healthpeak Properties (DOC).

SA analysts continue to grade the ETF a Hold.

Here is a look at XLRE subsector performance: