Real Estate

Perspectives on property

A good time to buy property equities?
December 2018
Share
Subscribe to our Insights

Risk Disclaimer

This document is intended to be of general interest only and does not constitute legal, tax or investment advice nor is it an offer or solicitation to purchase shares of the fund.

Financial advisers are responsible for determining whether an investment in the fund, and which share class, is suitable for their clients.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

A good time to buy property equities?

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.

Rising interest rates not necessarily triggering a fall in property prices 

Source : BMO Global Asset Management, Green Street Advisors. Data as at 31.08.2018, CPI rebased to 100. Green Street’s Property Price Index (CPPI) is a time series of unleveraged U.S commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. All Property CPPI weights: retail (20%), office (17.5%), apartment (15%), health care (15%), industrial (10%), lodging (7.5%), net lease (5%), self storage (5%), manufactured home park (2.5%), and student housing (2.5%). 

Retail – a basket case or a case for our basket?

The shift to online has hit the high street hard, and in those portfolios where we hold physical assets we have zero exposure to retail, preferring instead to maintain an emphasis on industrials and logistics.  We are, however, mindful that some nuanced value is emerging – an interesting trend as we’re increasingly conscious that rents must continue to grow to justify the current pricing of industrial assets In the listed space, we are still wary of names exposed to fashion retail given the growing dominance of online sales in this sector.  We do see some value in more community orientated retail space and are comforted that rents have become more affordable to a broader range of businesses including large discounters and those in the healthcare sector.  For now, though, we’re comfortable with our stance and see better opportunities in South East offices – a sector that’s seen a significant constriction in supply thanks to permitted development allowing a switch from office to residential usage. 

 

Where from here?  A curate’s egg

From a broader perspective we’re relatively upbeat on the prospects for listed real estate but we also acknowledge risks associated with the likes of Brexit, trade tensions and US dollar strength. Selectivity is crucial as we expect the divergence in performance between subsectors that has characterised 2018 to remain a feature from here.  Investing via listed real estate provides us with an advantage as we’re able to actively target those areas we deem best placed.  Alongside the likes of South East office and industrial assets that means favouring more alternative sectors like student accommodation, self-storage and budget hotels.

Risk Disclaimer

This document is intended to be of general interest only and does not constitute legal, tax or investment advice nor is it an offer or solicitation to purchase shares of the fund.

Financial advisers are responsible for determining whether an investment in the fund, and which share class, is suitable for their clients.

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Use our handy glossary to look up any technical jargon you are unfamiliar with.

Related capability

Real Estate