An interesting thing about the current market situation is that there are more transactions than a few months ago. Certainly some parts of the market are very expensive. Tech companies are going through the roof, utilities are flying and consumer staples are holding up. It is a very divided market.
An area that is still very undervalued is the REIT sector. There are so many great companies that trade at relatively low valuations even today. Although these companies have often abandoned their year lows, they are still trading at reduced levels.
Of all the puzzled stocks, real estate is probably the most confusing in the current market situation. The REITs were destroyed when everyone was forced to stay at home a few months ago. Many fell more than 50% in the collapse and are still at low levels today.
What makes my head spin is the difference between general real estate prices and the stocks of real estate companies. Real estate prices are currently rising and REIT prices are headed in the opposite direction. So why is this dichotomy taking place?
Real estate prices are currently increasing in real time due to the artificially low real estate prices put in place by the central bank. People are injecting money into the sector, pushing up general property prices again.
REIT like Brookfield Property Partners LP (TSX: BPY.UN) (NASDAQ: BPY), on the other hand, trade in profits and future growth. The threat to REITs is the lack of tenant income. This has happened in recent months and could continue to be a problem if the economy remains weak for an extended period. Brookfield recently said that rents are going up as the bottlenecks start to decrease.
The long-term question for REITs is how much economic suffering is felt. We have everyone; central bankers, the International Monetary Fund and the OECD all claim that things will go wrong for a while.
Real estate prices
Another potential problem with general house prices is the very real possibility that house prices could collapse. Of course, at the moment, prices seem to be improving. But what if the recession lasts for an extended period?
I do not know how long the Canadian government can continue to spend. He has already lost his AAA rating from at least one rating agency and we are only a few months away.
If the recession worsens, people could start defaulting on their loans at an accelerated rate. Remember that real estate is a very effective type of investment. If loans start to deteriorate, it can quickly turn into a deluge.
For this reason, I am much more interested in keeping Brookfield Property Partners as an investment. The majority of properties are found in the worst areas, offices and retail, which has resulted in a stock price shot down. But he is also a member of the Brookfield group of companies. This global giant is best able to weather the storm because of its deep pockets and its nose for deals.
It also has a pretty nice distribution to collect while you wait for this thing to double. For the moment, it has a double-digit return that it should be able to maintain despite the recession. It even aims to continue increase its distribution in the 5-8% range in the future.
Distribution currently stands at around 12%, making this title one of the best performing in the REIT sector. In my opinion, this stock also has one of the best chances of maintaining this distribution in the future.
Real estate is on fire, but REITs are cheap. Despite the fact that there are legitimate concerns about the state of the economy and the transition to online commerce, Brookfield Property is well positioned to shine in the future.
It will be a bumpy ride while you wait for the economy to get back on track, but if you hold on in bad times, you’ll be glad you bought the name at such a reduced price.
These actions are also great opportunities.
Renowned Canadian investor Iain Butler has just named 10 stocks that Canadians can buy TODAY. So if you are tired of reading about other people getting rich on the stock market, this could be a good day for you. Because Motley Fool Canada offers a 65% discount on the list price for its best stock selection service, as well as a full money back guarantee for membership fees on what you pay for the service. Just click here to find out how you can benefit.
Fool contributor Kris knutson owns shares of Brookfield Property Partners LP. The Motley Fool recommends the Brookfield Property Partners LP.