This is a question I’m regularly asked. My response is a positive one – albeit with the caveat that being selective is essential. I have an upbeat assessment which is based on two key factors. First, many property shares are now trading at large discounts to their net asset value, which combined with earnings growth and low debt costs result produces a compelling valuation case.
Second, fundamentals provide a solid foundation. Income has long been one of the key benefits of property and the spread between property and comparative fixed income assets remains attractive. Critically, there’s scope for that income to grow with property dividend yields predicted to rise again in 2019 against a backdrop of rental growth. Of course, rental growth isn’t universal but there are pockets where strong and improving tenant demand combine with a comparative lack of supply to push rents higher. Locations and property sectors boasting these characteristics include office space in Stockholm, Paris, Madrid and Barcelona, residential property in Germany and logistics space across all of Europe.
Rising rates a worry?
I’m also commonly quizzed on the impact of rising interest rates – should we be worried about them as a property investor? The US offers an interesting gauge as to their potential influence and as we can see in the chart, property values have remained stable against a backdrop of higher borrowing costs. Several factors are at play here. Rates are rising because the economy is doing well – a positive for a pro-cyclical asset class like property and with speculative development levels remaining subdued post the Global Financial Crisis (GFC) oversupply isn’t an issue. We expect this scenario to play out elsewhere. Looking at central London offices for example, rents grew consistently between 2012-16 but the normal supply response didn’t materialise meaning that even as demand growth slows, rents have remained stable. It’s also unlikely that rates will rise as fast nor as far in Europe and the UK as they’re expected to do in the US.