Rising mortgage rates and high prices are weighing on sales of existing homes. The National Association of Realtors (NAR) on Tuesday reported that home prices in May were up 14.8% year over year to a record average of $407,600. Sales were lower for the fourth straight month, down 3.4% from April’s level and down 8.6% compared to May 2021. Home price growth has been forecast to rise in a range of 6.6% to 13.9% in 2022.
Renters may see an even bigger increase in housing costs this year. NAR has forecast rent prices to rise by 7.1% in 2022. In large part, that is due to a lack of rental housing. According to Harvard’s Joint Center for Housing Studies, in the third quarter of last year, the growth in occupied apartments outran new rental construction by nearly 250,000 units.
A team of Credit Suisse analysts led by Tayo Okusanya has initiated coverage on 25 U.S. real estate investment trusts (REITs) and named five top picks from among nine industry sectors. The team has an Overweight rating on the apartments, single-family rentals and towers sectors. Market Weight ratings were given to the data centers, shopping centers, health care, triple weight retail and mortgage sectors, and the single Underweight rating went to the office sector.
The analysts said that they expected most of the companies in the apartments sector to hit the high end of 2022 guidance or to raise guidance “given still attractive demand/supply fundamentals and home affordability remain a challenge, which supports rent and occupancy growth.” In the single-family rental sector, the same demand/supply fundamentals apply, but the analysts prefer multifamily sectors because single-family rentals remain more expensive and “are likely to have slower earnings growth over the next 12-24 months.” Credit Suisse sees the towers sector as a major beneficiary of the continued rollout of 5G network connectivity.
Here is a look at Credit Suisse’s top five REIT picks, listed in order of their potential upside to the current price of the stock.
WeWork Inc. (NYSE: WE) gets an Outperform rating from Credit Suisse and a price target of $11. At a share price of $5.00, the upside potential is 105.6%.
At one time in 2019, WeWork had a valuation of $47 billion. At the current price, its market cap is closer to $4 billion, and the story of how it got there is well-known and was recently the subject of a docuseries, “WeCrashed,” from Apple TV+. Here is how the Credit Suisse team sees the company now:
Attractive total addressable market for co-working industry, and market share gains vs traditional office should pave the way for positive FCF [free cash flow] by 2023, especially with growth in higher-margin products such as All Access and Workplace, along with an improved capital structure. The stock trades like a broken SPAC, even though it isn’t.
American Tower Corp. (NYSE: AMT) owns, operates and develops multitenant communications towers. Credit Suisse rates the stock as Outperform with a price target of $313. At a share price of around $236, the upside potential is 32.5%.
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