Matthew Hoult
Head of Global Listed Real Estate

Global Listed Real Estate (GLRE) has provided investors with strong returns over the past few years. Can they continue to do so this year?

What is the outlook for global listed real estate?

Over the past three years, GLRE has provided good returns for their investors. Last year alone they outperformed the global equities market by over 10%. (Bloomberg, May 2013).

We believe global listed property will continue this strong performance and their returns to investors as the valuation case regarding property securities is now even more compelling than it was three years ago.

There are two main fundamentals behind the strong performance of GLRE since the economic crisis. Firstly, REITs tend to have invested in the highest quality real estate in the market in which they are located in. They have tended to acquire the best assets as they have had access to the cheapest cost of capital – the share market. Secondly, their debt has been reduced. This means that they are now stronger than they were before and are now in much better financial shape.

This is highlighted by the bond-yield spread, the differential between the yield that you get from property securities and the 10 year US bond, which is greater today than it was three years ago when the outperformance really started.

In addition, future earnings growth from the listed properties securities is also greater today than it was three years ago.

Accordingly, it can be reasoned that the combination of these two metrics highlights that the performance outlook for property, in comparison to other asset classes, looks to be stronger today than it was when the outperformance began.

What are the most promising sectors and regions?

There tends to be pockets within different regions and sectors which are showing extraordinary strength. However, at the same time, there also tends to be some pockets of weakness as well. As a result, it becomes very difficult to identify one region or sector as a whole which are presenting opportunities. This is especially being seen in Europe, the US and Asia.

Currently, Asia is an area which is showing to have the most compelling returns on a seven to ten year basis.

Another area of interest is the United Kingdom, where there are pockets of real estate which are performing well. This includes the west end of London and some technology- exposed, office landlords. Both of these areas look set to do well.

The market in Australia is another area which has performed well. This has been seen in terms of retail landlords (such as Westfield) who have performed above expectations and have generated very positive returns. This outperformance may start to abate in the coming period.

The retail property sector globally was one of the top two performing sectors last year – despite the trend to online retail seemingly suggesting the opposite.

Another area which currently seems to be picking up is hotels. This is a result of business travel starting to pick up again after the economic crisis. We have seen improvements in the metrics on air and train travel and this means more time is being spent in hotels.

Industrial real estate is also beginning to look attractive but again it is worth highlighting that we are targeting the pockets of strength for our investments.

The benefits of investing in listed real estate

Stable, reliable income streams - To help reduce risk in a property portfolio it should be ideally comprised of properties with good tenant diversification and staggered lease maturities.

Inflation hedging - Some real estate leases contain provisions for rental increases to be indexed to inflation, while in other cases there is an opportunity to increase rental rates whenever a lease term expires and the tenant is renewed. Either way, real estate income should keep pace with inflation, helping to maintain real returns.

Diversification - Investing in property can provide important portfolio diversification benefits as different types of property have different risk and return characteristics.

Listed property has the potential for higher returns and is more liquid than direct property. While it has a higher correlation to equities, it provides diversification by investing in a wide variety of property sectors and geographies.

Global investment opportunities - From a global perspective, as more countries introduce real estate investment trust (REIT) structures, there are even greater opportunities for global investment and portfolio diversification. Since 1990 new entrants to the market have included the UK, Germany, Singapore, Canada, Malaysia and Japan and countries currently under consideration include emerging markets Brazil, China and India.

You can also view Matthew Hoult at AMP Capital TV


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