Global real estate had an excellent start to 2012 with total returns up 9.88%*. Asia was the bestperforming region led by Japan and Singapore, while the US and Canada lagged and Europe proved resilient. The outlook remains promising: most markets outside North America are trading at a discount to NAv and offer dividend yields substantially above state debt. But there are some clouds.
As stronger economic conditions in the US boosted real estate stocks, sentiment also improved after the ECB provided liquidity, which helped bring short-term stability to the eurozone. Real estate companies generally had good access to the capital markets, particularly in North America. Japanese real estate stocks in particular were boosted by the gradual recovery of economic confidence and the market’s perception that the direct market, particularly in Tokyo, is starting to bottom out.
Volatility eased further across global real estate markets during Q1 and is now well below the peaks of Q3 2011 at the height of the eurozone sovereign debt crisis. Real estate securities benefited from the ‘risk-on’ stance that marked global investor sentiment during the period. By the end of the quarter, the FTSE EPRA NAREIT Global Total Return index had pulled back from its 15 March peak. The return of market concerns over eurozone sovereign debt and the direction of China’s economy encouraged investors to start taking profits.
Discount close to historical levels
Real estate valuations have not changed significantly over the period despite the almost 10% rise in share prices so far this year. The average discount to NAv of 9.6% remains close to historical averages (10.6%). Markets such as Hong Kong and Japan are trading at deep discounts, although the US sector is trading at a premium.
Real estate dividend yields still offer an average spread of some 200bp over long-term government bonds across the world. The spread remains largest in the Benelux region, especially in the Netherlands, and is still impressive in markets such as Canada and the US.
There are concerns that real estate share prices could come under pressure if long-term government bond yields rise in response to inflationary worries, although policymakers in Asia, Europe and the US appear committed to ensuring long-dated rates remain low in the medium term. Clearly, there is a need to keep an eye on the development of long-term rates since a further rise in yields, and consequently debt costs, would push up the required returns.
Improving economy
In general, the outlook seems bright. We believe the US housing market looks set to stabilise due to an improving economy, steadier jobs growth and declining inventory.
In Asia, residential markets are showing signs of cooling off across the region, and not just in Chinese Tier-1 cities. Commercial property markets other than in Japan remain relatively robust and we expect the Tokyo office market to bottom out in Q2, which should lend welcome support to stock prices.
Appetite for Europe
Despite the indifferent state of the economy and weak property market fundamentals, there remains a huge interest in investing in European real estate. Simon Property Group’s EUR 1.5 billion deal with BNP Paribas on a 28.7% stake in French REIT Klépierre highlighted this interest. Japan’s Mitsui Fudosan, one of the largest real estate companies in the world, is to launch an acquisition and development programme in Europe worth around EUR 4.7 billion.
We are likely to see further dispersion in the performance of direct European real estate markets, with locations such as the central business district office markets of Paris, London and Berlin attracting occupiers and helping to maintain rent levels. However, the secondary and provincial markets of Europe look vulnerable to low growth or even a downturn. We believe the UK has good growth prospects, particularly in the London and south-eastern markets. The Nordic region, too, offers better property market prospects than the eurozone.
An obvious concern in parts of the market is that banks that need to shrink their balance sheet will demand debt repayment, instead of financing a roll-over. This could cause foreclosures to surge and restrain economic growth. Even so, we believe that the overall outlook for real estate markets and stocks is positive, despite worries over a possible spike in inflation and any negative lending consequences from bank deleveraging.
Shaun StevensReal estate strategist – BNPP IP
* FTSE EPRA NAREIT Global Net Return index, EUR, end-March