Wie geht es mit globalen Immobilien-Aktien weiter?

The sky seemed the limit for real estate in the years 2003-2007. But the credit crisis ended this story quickly. Real estate and the lending of money was a big problem.

Now we are well into 2013, what has changed in this sector?

The major change in the last five years among the real estate investment trusts (REITs) in North America, Europe and Australia has been the dramatic reconstruction of balance sheets. Equity issuance, both constructive (for investing in accretive deals) and destructive (dilutive issuance), combined with cheaper and longer duration debt, has put the average REIT in a strong position. A more recent change has been a switch among some investors from a search for yield to a search for growth.

How are the fundamentals doing?

We see moderate rental growth in several markets, notably in the US and the UK, based on employment and a lack of new construction. At the same time there is strong investor demand for assets in safe havens, which means London, Paris and the gateway cities of the US. This may lead to lower initial property yields even with rising bond yields.

How interesting (or not) are the sub-sectors (retail, residences, etc)?

Retail makes up the largest part of the listed property universe and is the most challenging sector. Weak consumer demand in some cases, and the growth of internet shopping in all, mean that many shopping centres are struggling. The larger malls and those landlords who adapt to the new environment look likely to outperform. Offices are an interesting sector in the UK but in few other cities. Tokyo has seen some improvement in condominiums and new office buildings, but we have yet to see a general recovery in rents.

Hong Kong, which has the highest office rents in the world, is likely to see them fall over the next year as vacancy in the prime central business district rises. Apartment prices are also falling as a result of recent strong rises, a fear of rising interest rates and government cooling measures, such as high transfer taxes.

And if we look at regions, which offers the best opportunities – Europe, the US or Asia?

The US, as a region, offers in our view the best opportunity in the next year or so. We anticipate earnings growth of 8% and dividend growth of 10%. With REITs trading on average at a 5% discount to net asset value and a starting dividend yield of 4%, a total return of 12-14% appears achievable. In Europe, only the UK, Sweden, and Germany look interesting, and in Asia only Japan.

What does the industry look like and what are the expectations for the near future?

The listed property sector is increasingly affected by exchange-traded fund flows, which bring volatility and an inefficient bias to large-cap stocks. This is a reaction to the failure of most active managers to outperform, and until this situation changes we expect more of the same.

In a standard asset allocation real estate often comes next to bonds, stocks, cash and alternative investments. Does real estate belong in this kind of portfolio?

Institutions are currently increasing their real estate allocations, partly in expectation of rising government bond yields. The expected long-term returns of 7% currently look relatively attractive, offering the income characteristics of bonds with the growth characteristics of equities. If the question is how listed real estate fits into the equation, the answer depends on a number of subjective judgments. If one accepts that in the long-run REITs show a return correlated with the underlying assets, they can play a part, and institutions in some countries accept this. If one views the volatility that comes with continuous pricing as too much of a deterrent, direct or unlisted investment is the only option.

How large can the percentage of real estate be in a portfolio?

This depends on individual circumstances, such as age and risk appetite. However, an allocation of around 10% is generally accepted as an optimal diversifying percentage. Studies show that REITs, as part of this 10% allocation, both add to return and reduce risk, through diversification, low transaction costs and liquidity.

Give two examples of companies within your top 10 holdings. What have been the returns and how satisfied are you about this?

Simon Property Group, the largest REIT in both the US and the world, represents 6% of our fund. The total return this year has been disappointing (-0.2% in dollar terms as at 31 October), but its recovery over the past two months has been encouraging. Simon is a high quality company and a core holding, but as the largest REIT is more affected by general investor sentiment and less by the fundamentals than most stocks.

Another significant holding at 4.4% of the fund is Mitsui Fudosan, one of the big three Japanese property companies. The total return year to date has been 56% in yen terms, driven by quantitative easing and the expectation of asset repricing. We remain overweight, but we do not expect a repeat.

Patrick Sumner
Head of Property Equities