International property outlook

Posted On Tuesday, 26 June 2012 14:24 Published by eProp Commercial Property News
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The views held by some market commentators in the UK and across the Atlantic could perhaps be construed as somewhat optimistic, but at the very least they suggest where some of the key sector and niche market opportunities lie

Jones Lang LaSalleThe Scotsman recently mused that aside from your own home, one of the key ways to benefit from rising values in bricks and mortar is to invest in a (listed) property fund. As correctly pointed out, this not only fulfils the savings mantra to diversify, it also means you can enter the commercial field.

True commercial property funds which invest chiefly in “bricks and mortar” are cited as having far less correlation to the stock market and are less risky than investing in property shares and so when stock markets fall, these funds can provide welcome stability in client portfolios.

Then again, many asset managers mention taking a multi-asset approach to portfolios; and this is where property (fund of) funds or real estate investment trusts (REITS) can shine as these are able to be held at much lower costs than traditional property funds and there is less danger of the funds being suspended at times of serious liquidity.

“Commercial property can provide consistent longer-term returns and this, coupled with its diversifying nature, provides some protection from stock market falls,” says one financial planner who in turn typically recommends sector exposure of 5 to 12 per cent in client portfolios.

There is a cautionary note which applies equally to just about anywhere in the world: Investors need to check if a fund is investing in actual properties or in more volatile securities. “Good quality bricks and mortar property funds should now be returning to performing in the way that historically they were supposed to – good, steady rental income from quality tenants plus some capital growth from the underlying asset,” says another financial planner.

This planner avoids funds with exposure to high streets in run-down city centres, adding that “commercial property valuations should now be at more realistic levels following the boom and bust of the mid to late 2000s.”

Another consideration is the tenant market that each fund is targeting. Ideally, investors wish to have their money 'fully employed' and not have potential rental income cut by vacant properties.

Looking at the balance that can be achieved between income and growth is also a good indicator: If a fund is stressing its ability to pay a high yield, it implies lower growth prospects. Demand for income – particularly for those close to or in retirement – has boosted the price of some high yield funds in the UK.

Student accommodation is tipped by a further financial planer. “There is large demand for halls of residence and purpose-built flats... and income yields are around 8 per cent, relatively low risk, and with the prospect of capital growth.” That being said, a prominent estate agency predicts total returns in the student accommodation market will be 11.5 per cent in the current academic year, down from a staggering 13.5 per cent in the previous 12 months.

Most analysts support and emphasise the importance of holding property funds over a long period: during a recession for example, commercial property tends to be one of the last asset classes to recover, as it takes time for successful companies to seek extra storage, retail and office space.

Some investors are attracted to funds that invest in healthcare buildings which are let to GPs, dentists, pharmacies and primary care trusts. Since the income is contractually payable by the government, it is a very reliable income stream. But perhaps there is also a cuationary to this rosy outlook which has broadly to do with serious ratinalisation in the NHF.

Finally bricks and mortar funds which may pay out more income than the cash they are receiving in rents must be approached with caution. Whilst investment trusts can retain up to 15 per cent of their revenue in any one year to smooth performance over the years, some of the newer property trusts have not had long enough to build up income reserves.

Global real Estate perspective:

With a strong pipeline of deals, transaction volumes of global investment in 2012 are expected to match 2011 levels, says  a recent Jones Lang LaSalle report

The Second Quarter 2012 Global Market Perspective report cites that the world‘s major commercial real estate markets have been in recovery mode since the crisis of 2008/2009, with 2011 having shown the strongest evidence of an upswing so far. Moving through 2012 nonetheless, first quarter market data suggests a slowing in forward momentum, with investment and leasing volumes down by about one-fifth compared to a year ago.

“We believe this is a lagged market response to the escalation of the euro crisis during the second half of 2011 and, as such, it is likely to be a temporary slowdown. Given the more positive outlook for the global economy, the significant weight of capital targeting commercial real estate and the strong pipeline of deals, we fully expect the global real estate markets to resume their steady, measured recovery during the remainder of 2012,” the report said.

This is despite the global investment volumes down 21 per cent year- on-year, owing to a lack of product in core markets and constraints on debt finance. But with a strong pipeline of deals, transaction volumes for full-year 2012 are expected to match 2011 levels, the Jones Lang LaSalle report revealed.

On the other hand, overall leasing activity has slowed, a delayed response to corporate occupier caution. Q1 2012 volumes are down 15-25 per cent year-on-year. Gross leasing volumes are expected to be slightly lower in 2012 compared to 2011.

Sectors that continue to grow are technology, energy and commodity-rich markets that are registering robust corporate occupier demand. Domestic corporations and outsourcing (BPO) are driving demand in many emerging markets. The financial sector remains subdued however.

In the hospitality industry, hotel operators are stepping up acquisitions in Q1 2012

The Americas region still offers the greatest potential to outperform in 2012. In the US, the most sought-after property is the rental apartment market which remains strong.

Following London, New York is the second top city for real estate capital , followed by Tokyo.

In terms of the retail market, international retailers are targeting emerging markets, with a strong focus on Greater China with retailers moving deep into China‘s secondary and tertiary cities. In Europe, the retailers are no less sanguine with rents in prime retail markets rising at their fastest rate in over a year.

Last modified on Wednesday, 14 May 2014 19:33

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