These names are UBS's top picks in the global real estate sector

Global real estate stocks underperformed the broader equity market last month, gaining 2.0% versus 6.4% for global equities, according to UBS analysts, with Chinese property stocks dragging down the sector due to a stagnant housing market. Despite policy easing, China's new home prices remained unchanged in April MoM and fell 4.0% YoY, while contract sales from top developers weakened. UBS remains constructive on select U.S. REITs like Equinix, Digital Realty, and American Tower, anticipating a property market stabilization driven by positive land sales and a rebounding luxury housing market.

Analysis

Global real estate stocks significantly underperformed the broader equity market last month, with the global real estate index returning 2.0% compared to a 6.4% gain for global equities, a shortfall of 4.4% as highlighted by UBS. This underperformance was substantially influenced by weakness in Chinese property stocks, which declined by 4.1%. Data from China indicates persistent stagnation in its property market, with new home prices in April remaining unchanged month-over-month and falling 4.0% year-over-year, a marginal improvement from March's 4.5% annual decline, despite government measures like reduced mortgage costs. Further underscoring the sector's challenges, contract sales from China's top 100 listed developers decreased by 10% year-over-year in May, deteriorating from an 9% drop in April. In contrast, Hong Kong's real estate stocks experienced a jump, buoyed by a decline in benchmark interest rates. Sector-wise, offices and hotels demonstrated strength, rising by 6.1% and 5.3% respectively, while residential stocks fell 1.7%. Looking ahead, UBS anticipates a stabilization in the property market, supported by positive year-over-year land sales for the first time in three years and a recovering luxury housing market. Consequently, UBS remains constructive on U.S. REITs such as Equinix (EQIX), Digital Realty (DLR), and American Tower (AMT), and holds positive views on select global names including Greentown China (HK:3900), Yuexiu Property (HK:0123), Ke Holdings (BEKE) in China, Gecina (EPA:GFCP) and WDP (EBR:WDPP) in Europe, and Dexus (ASX:DXS), Goodman Group (ASX:GMG), and GPT Group (ASX:GPT) in Australia. The overall market sentiment is mixed, reflecting these divergent trends and cautious optimism for specific segments.

Key Decisions for Investors

• Investors should exercise caution regarding broad exposure to global real estate, particularly in the Chinese residential sector, given its persistent weakness and underperformance.
• Consider focusing on specific segments and geographies highlighted by UBS, such as U.S. data center and telecom REITs (e.g., EQIX, DLR, AMT), and select European and Australian property companies, which exhibit more resilient fundamentals or specific growth catalysts.
• Monitor key indicators including the efficacy of Chinese stimulus measures, trends in benchmark interest rates globally, and the diverging performance of real estate sub-sectors like offices/hotels versus residential.
• For specific stocks like GPT, which UBS views positively and InvestingPro suggests may be undervalued, conduct thorough due diligence to assess if current valuations present attractive entry points.