Real Estate Stocks Are a Bold Bet on Monetary Policy Reversal

Pessimism around real estate stocks is so severe as interest rates climb that conditions exist for a dramatic reversal to the benefit of investors with good timing. The Stoxx 600 Real Estate index has slid about 7% in 2026 and is set for a third consecutive year of underperformance. While the sector has kept to a range over that period, the gap relative to the broader Stoxx 600 index is now greater than during the slump caused by the global financial crisis.

"The shift from anticipated rate cuts to potential rate increases has intensified the difficult environment for real estate investments, as higher borrowing costs and tighter financial conditions weigh on asset values and investor sentiment," said JPMorgan Chase & Co. strategists led by Mislav Matejka. "The sector is a clear bond proxy and is affected by rising bond yields."

The gloom has been running for a while, but intensified over the summer. According to the September Bank of America Corp. fund manager survey, European real estate is among the biggest underweights, with a net 36% of investors holding less than their benchmarks allow. It’s the highest proportion in at least two years, and nearly triple July’s figure. The sector’s close correlation to bonds means its unloved status is well deserved. Central banks are on a tightening path as they confront inflation, and as long as oil prices remain elevated and the economy stays resilient, policymakers have no reason to change course. The swap market currently expects three more rate hikes from the European Central Bank by the end of next June, and four from the Bank of England by the end of July. And yet, the aggressive rate pricing pushing bond yields higher can just as quickly reverse. Oil prices have been a major driver for bonds and stocks since the start of the Iran war, and while there hasn’t been much progress on peace talks, any breakthrough could change the picture drastically. That’s why the outlook for rates can be seen as a coin toss, and when mood is this bleak, a sudden change in direction can be violent. The sector’s track record has been so dismal that some are starting to view the negativity as overdone. Strategists at Deutsche Bank AG and Bof A, for example, both have overweight ratings on real estate. Beaten-down prices can also be seen as supportive, with the group trading well below average valuation levels on an absolute and relative basis. For Bof A, part of the case for real estate stems from how the higher-for-longer rate outlook will play out for the economy and risk assets.

"Following the recent underperformance, our bund yield and PMI projections imply around 15% upside for real estate’s price relative in the months ahead," said Bof A strategists led by Sebastian Raedler. "Given its domestic exposure, real estate tends to outperform the yield-implied trajectory when euro area PMIs strengthen relative to global PMIs."

Real estate stocks aren’t all created equal, and there is divergence between regions. Local policies have the power to accelerate or limit losses. In Berlin, for example, a radical proposal to seize large housing portfolios is back on the agenda, providing an additional threat to the sector. German names are already among the worst performers in the European subindex. By contrast, UK homebuilders have just been handed a reprieve, with the Labour government willing to revive a help-to-buy program. It’s a perfectly timed boost for a sector that was in a downward spiral, with mortgage approvals hitting a 32-month low this week. The sharp market reaction to the news serves as a good example of the reversal that can be triggered by a policy switch.

"UK housing stocks were already deeply undervalued. Now they have a catalyst," said Clive Beagles, co-manager of the J O Hambro Capital Management Ltd. UK Equity Income fund. "The government’s new equity loan scheme could revive new-build activity, unlock earnings growth...