REITs have weathered the credit storm fairly well. Earnings reports have been strong. And REIT stock prices have recovered at least partially from the deep sell-offs that occurred late last year and early this year. But Goldman Sachs doesn't seem to think that the picture is so rosy. REIT stocks fell Wednesday when the report first broke. But a quick glance today shows that a lot of REITs finished Thursday up.
Goldman Sachs said it remained cautious on U.S. Real Estate Investment Trusts and commercial real estate, as the worst was yet to come, given the rising capitalization rates, slowing growth rates and higher funding costs.
The brokerage said the REITs have outperformed the broader market so far, as investors have favored the group's average dividend yield of 4.4 percent and relatively stable cash flow growth.
But Goldman said the fundamentals are only starting to deteriorate and current valuations do not fully reflect the risk that growth expectations should moderate in second half of 2008 and 2009.
The brokerage, which continues to underweight REITs, said it expects a downside risk of 10 percent or more from current levels.