How will real estate investment trusts react if there’s a recession in the US? That’s the question posed by Goldman Sachs in a new research report out today that takes a look at the state of the REIT sector. The report, a copy of which has been reviewed by ValueWalk, tries to estimate the potential downside for select REITs if the US economy does indeed being to contract once again, as some economists are predicting.
Goldman’s economic research team puts the odds of a US recession at only 18% and 23% over the next one and two years respectively. But it never hurts to be prepared, and it’s quite interesting to assess the possible recession downside for the REIT sector – a sector that’s considered to be relatively defensive.
REITs: 22% downside potential in a recession
The equity analysts in charge of Goldman’s REIT report assumed the following stresses for REITs during the next two years: (1) earnings shock, net operating income declines could be similar to 2009 levels, and (2) multiple shock, it is assumed that 2017 multiples fall to second-half 2009 levels.
David Barse, Third Avenue: REDavid Barse, Third Avenue: R
Using the above stress-test factors, Goldman estimates that the REIT sector as a whole (those REITs covered by Goldman’s research team) could fall a further 22% from present levels if a recession emerges. Interestingly, the bank’s analysis also shows that there’s not a strong correlation between recession valuation downside and leverage:
“…thus our analysis does not suggest investors should simply purchase low leverage stocks at the expense of high leverage stocks. We estimate there is below average-downside risk in certain high-leverage stocks (FCE-A, and B mall REITs as examples) while some low-leverage stocks have above-average downside risk (such as EQR, EXR, PSA, and O).”
And like all backtested research, there are some critical caveats to Goldman’s REIT analysis, namely, due to market changes that have taken place since 2009, past performance may not be indicative of future performance:
