(Bloomberg) -- Short sellers are closing more bearish bets on European property companies because of expectations falling interest rates will support stock valuations.

Short interest as a percentage of free float in the sector declined by another 10 basis points to 2.3% in August, according to an analysis from UBS Group AG. That’s the lowest level since at least June 2022 and down from a peak of 4.9% last year, figures from the Swiss bank show.

“This coincides with growing confidence across the market that valuations have either bottomed out or are soon to do so, while leverage across the sector continues to improve and rate cuts begin to materialize,” analysts including Charles Boissier said in a note to clients.

Property sector short interest has also fallen below the 2.8% level measured across the broader European equity market, the data shows. That’s a striking change from the picture last year, when it was far higher.

The debt-fueled property sector is gradually recovering from a plunge that was spurred by central banks hiking rates in an effort to tame inflation. The Stoxx Europe 600 Real Estate index hit its highest intraday level in more than two years on Wednesday.

Bernstein analysts including Ben Richford gave a similar upbeat view on European real estate valuations on Thursday. The team upgraded five stocks to outperform from market perform, including Land Securities Group Plc, Icade and TAG Immobilien AG.

“The downward cycle is over,” they wrote.

--With assistance from Lisa Pham.