Real estate stocks gain after inflation report even as major market averages lose

Real estate stocks gained after an in-line inflation data, even as the major market averages marked a loss; The Real Estate Select Sector SPDR ETF (NYSEARCA:XLRE) rose by 5.17% during the month of May.

For the week ended May 31, the ETF rose 1.87% from last week to close at 38.05 on Friday. The index posted gains in two of the four sessions of the holiday-shortened week.

The week saw the Q1 U.S. gross domestic product annualized growth rate revised to +1.3%, compared to the Commerce Department's initial estimate of +1.6%. The new growth rate is lower than the 1.5% consensus estimate but was well received by the real estate sector. XLRE ended the day 1.44% higher at 37.31.

The Federal Reserve's preferred inflation gauge, the core PCE Price Index, which came out on Friday, was the biggest driver for the week. The index increased 0.2% in April, matching the consensus estimate and cooling a tad from the +0.3% pace in March. Housing inflation held steady on a monthly basis at +0.4%.

"The PCE data confirms price increases aren't as sticky as feared, keeping hopes of at least one rate cut on the table," David Russell, global head of Market Strategy at TradeStation, said.

The probability of a September 25-basis-point rate cut has now increased to 47.0% from 45.1% on Thursday, according to the CME FedWatch Tool. XLRE finished the last day of the month 1.98% higher and is trading about 2% above its 200-day simple moving average.

On the other side, the Dow Jones Equity All REIT Total Return Index saw a weekly gain of 2.10%, while the FTSE Nareit All Equity REITs was up 1.04%.

Meanwhile, the broader S&P 500 marked a loss of 0.51% on a weekly basis, largely impacted by not-so-impressive earnings in the tech sector.

Commercial Real Estate

Conditions in the commercial real estate sector softened as supply concerns, tight credit conditions and elevated borrowing costs remain constraining factors, the Fed said in its May 2024 Beige Book report on Wednesday.

"The commercial real estate market has not been immune from economic and financial market challenges. Today's property market is generally marked by supply–demand imbalances, declining occupancy rates and moderating rental growth rates. These conditions will likely place further pressures on property operational performance gains in 2024," Nareit's senior vice president of research, Edward Pierzak, told Seeking Alpha.

Large banks may be more exposed to commercial property risks than regulators appreciate, considering the credit lines and term loans they provide to REITs, a Bloomberg News report said. The exposure to the sector increases by about 40% for big banks when that indirect lending to REITs is added, Viral Acharya, a professor of economics at New York University, reportedly said.

Residential Space

Housing demand rose modestly in May, and single-family construction increased, though there were reports of rising rates impacting sales activity, the Beige Book said.

The U.S. Pending Home Sales Index sank 7.7% in April to 72.3. steeper than the -1.1% expected and reversing the 3.6% increase in March (revised from +3.4%). The report comes as home prices continued to increase in March, hitting new all-time highs, a report by S&P Global Market Intelligence showed, which cited the S&P CoreLogic Case-Shiller index. U.S. house prices have risen by 6.6% between Q1 of 2023 and Q1 of 2024, and by 1.1% from Q4 2023, the Federal Housing Finance Agency House Price Index said.

"Over the last six consecutive quarters, the low inventory of homes for sale continued to contribute to house price appreciation despite mortgage rates that hovered around 7 percent," said Anju Vajja, deputy director for FHFA's division of research and statistics.

Sentiments

The Real Estate Select Sector SPDR Fund ETF saw net outflows worth $16.84M this week, data from the information solutions provider VettaFi showed. Comparatively, the fund had logged inflows worth $15.18M last week.

The outflows imply bearish sentiments across the sector. However, the ETF had seen inflows worth $3.68M on Thursday after the GDP report.

SA's Quant Rating system continued to grade the ETF as Sell. The rating system assigns to XLRE a score of 2.46 on a scale of 5, grading the fund as C for Momentum, A for Expenses, C- for Dividends, D+ for Risk and A+ for Liquidity. SA analysts rate the fund as Buy.

Subsector Performance

Industrial REITs were the biggest gainers of the week, rising by 5.48% from last week. Real Estate Management & Development were laggards, declining by 4.91% on a weekly basis.

Healthcare REIT Ventas (VTR), telecom tower REIT American Tower (AMT) and retail REIT Simon Property Group (SPG) were the notable gainers of the week. Real estate services company CoStar Group (CSGP) and multi-family residential REIT Camden Property Trust (CPT) were among the losers.

Real estate developer Alset (AEI) and New Concept Energy (GBR) were the other major winners in the sector.

Here is a look at the subsector performance for the week: