FTSE shares have been enjoying a nice rally this year, with the FTSE 100 up by double-digits and the FTSE 250 following closely behind. While there are a lot of factors at play, it seems increasing anticipation of an interest rate cut is one of the most significant right now. After all, inflation’s now hovering at 2.3%, just shy of the Bank of England’s 2% goal.
However, despite this upward momentum, there are still plenty of enterprises primed to thrive once interest rate cuts materialise. This is especially true in the real estate sector, where many of these stocks tend to follow the underlying firm’s net asset value.
So let’s explore some property stocks that could surge once interest rate cuts start to emerge.
Warehouse demand continues to rise
Despite the slowdown in e-commerce spending these past few years, demand for order fulfilment warehouses has remained robust. With a short supply of prime-located logistics facilities, firms like Londonmetric Property (LSE:LMP) have had little trouble attracting and retaining tenants.
Londonmetric, in particular, has successfully maintained its dividends and even expanded them despite the adverse impacts of higher interest rates on its debt. After all, buying and maintaining commercial property isn’t cheap. And with over £1bn of loans on its books, an interest rate cut will be wonderful news for shareholders. Even more so given the subsequent resurgence of property prices.
Another interesting FTSE stock I continue to hold in my portfolio is Warehouse REIT (LSE:WHR). The firm hasn’t faired as well as Londonmetric as its smaller size proved to be a significant disadvantage.
With its own notable pile of leverage, the higher interest rates have forced management to sell some of its properties to shore up the balance sheet. This has subsequently led to a reduction in net rental income despite enjoying higher occupational rates. And, consequently, dividend growth has stalled with some analyst forecasts not predicting another hike until 2026.
While frustrating, it’s another case where interest rate cuts would be a powerful catalyst for sparking new growth. Higher property prices give the firm more negotiating power when disposing of underperforming properties, as well as reducing its debt servicing cost. Both of these could pave the way to higher income for shareholders, ahead of current analyst consensus.
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Let’s be realistic
Personally, based on current trends in the economy, I’m confident that an interest rate cut could emerge in the second half of 2024. Perhaps there could even be multiple rate cuts if inflation continues to move in the right direction.
However, time will tell whether this will happen as expected. After all, across the pond in America inflation seems to be making a comeback. And should the same thing happen here, then rate cuts could still be a while away. Even if they do materialise, rates will likely remain relatively high compared to the last decade of near-zero percent.
In other words, I don’t think it’s sensible to assume things are simply going to return to pre-pandemic levels. And investors should be on the lookout for any potential run-away valuations that may emerge once rates start to fall.
Nevertheless, looking at the prices of Londonmetric and Warehouse REIT today, these shares seem to be relatively cheap. And while the latter undeniably carries more risk, it could also hold a greater potential return.
