The BCA says investors need to dampen the property rally. By Investing.com

Investing.com — In a recent report, BCA Research urged investors to take a cautious approach to the real estate sector’s recent rebound, with distressed sectors such as office REITs leading the way.

But BCA analysts warn that this momentum may not be sustainable.

While real estate’s dividend yields appear attractive amid falling interest rates, the BCA points out several challenges that could impact the real estate sector.

“REITs will suffer if economic growth slows despite rate cuts,” the note explains.

BCA explains that historically, REITs tend to outperform just before the first interest rate cut, but tend to consolidate gains shortly thereafter, a pattern investors should consider.

Basically, BCA says the outlook for real estate is mixed. While its balance sheet remains healthy, the company notes that “net operating income is declining,” with margins only returning to pre-pandemic levels.

Additionally, disruptions related to the pandemic have created challenges within the sector, which are now said to be expanding.

BCA offers investors exposure to certain subsectors, including industrial REITs, which are under pressure from the manufacturing downturn and slowing online retail sales, as well as residential REITs dominated by multifamily properties, which are struggling with overbuilding, slow rent increases and rising delinquencies. It is recommended to reduce the proportion.

BCA added that the office REIT subsector also faces headwinds due to rising vacancy rates and increased non-performing loans.

The research firm suggests an overweight position in Specialized REITs, which provide exposure to the digital economy.

“We underweight real estate over a tactical investment horizon,” BCA says. Expecting economic growth to slow, we recommended maintaining an underweight stance on real estate in the short term. We expect economic growth to slow, and even low interest rates will not help the sector in such a situation. Moreover, delinquency rates are increasing and widening across subsectors, which does not bode well for sector performance.”