Residential real estate remains one of the “most attractive credit profiles available in the market”, according to a report by UBS Asset Management – but it warned investors must be “more discerning” than before.
The firm said that it is been extoling the virtues of the sector for lenders for 15 years and while it is now facing certain pressures, it remains more attractive than other sectors.
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“Consumer balance sheets are well positioned as homeowners have built a large cushion of equity in their homes and have very manageable debt service costs,” analysts at the firm said.
The report added that while the prevailing mortgage rates are near the highest levels over the past 15 years, the vast majority of the US housing stock either has no mortgage or has a mortgage the was originated prior to 2022. As a result, most homeowners with a mortgage are benefiting from having a fixed borrowing cost that are relatively low.
However, the firm cautioned that high current mortgage rates have in some cases stretched affordability to an unsustainable point, which could lead to modest declines in house prices if rates don’t come down.
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“Overall, we believe investors need to be more discerning than in the past,” the firm warned in its report.
“Strategies that were more heavily reliant on house price appreciation growth could produce disappointing results going forward. We remain focused on short duration residential real estate credit strategies that perform well in most forward-looking home price environments, not strategies that rely on rising home prices to achieve target returns.”
The firm said global residential real estate is projected to grow modestly by around 2% in 2025, despite the uncertainty brought by new tariffs.
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