SocGen analyst Paul Jackson downgraded the Eurozone real estate sector from Neutral to Underweight after SG’s real estate specialists whittled down their view on real estate stocks.

The dilemma of real estate stocks

What is more important—attractive valuation, or the risk of underperformance?

According to Jackson, the European real estate sector is presently available at a reasonable valuation compared to the European average. Yet it is difficult to ignore the sector’s inverse relationship with bond yields. Rising bond yields make the real estate sector underperform, and this factor could be a serious drag on the sector given that SocGen expects yields to rise by 200 basis points in the coming years.

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Another ground reality is that real estate rentals catch up with rising debt costs only after a time lag of some 1-2 years.

SocGen’s real estate team have established the correlation between rising bond yields and real estate underperformance, and have already taken the knife to price targets for most real estate stocks, and ratings for others.

But the catch is…

The above outlook is predicated on the expected improvement in the U.S. and European economies, with the natural fallout of bond yields rising to normal levels.  But yields could fall if the economies do not perform as expected.

Jackson’s other sector ratings

Overweight – Oil & Gas, Financials.

Neutral – Basic Industries, Industrials, Consumer Discretionary, Information Technology, Telecommunication Services, Utilities.

Underweight – Consumer Staples, Healthcare.