Patrick Sumner, head of global indirect property at London-based Henderson Global Investors, thinks that the market is like a wet racetrack: good, but soft in places. Better be careful where you tread, then.
“Low interest rates and bond yields are with us for a few more years yet, especially since the Japanese bazooka was brought to bear.
This has varying effects, from support for property values in developed markets to potential bubbles in developing markets. The search for income, the low cost of finance and a lack of new supply are the key drivers,” he said.
Although property equities delivered incredible returns — up by 258% since March 2009 — we must not forget the low base the market had reached by then.
“In our view, the current pricing of REITs [real estate investment trusts] relative to net asset values in the US and Europe fairly reflect the growth prospects in premiums of 6% and 1%, respectively.
“Asia is a more complex picture, with the property developers trading at discounts and the REITs at significant premiums.
The distortions created by increasing personal wealth, the lack of alternative sources of income, not to mention the Bank of Japan’s recent stimulus, suggests a cautious approach to these markets.”
But averages could be misleading, he said. “Property is an inefficient market where skilled managers can make a huge difference. Thus, some companies can trade at fully justified premiums because their growth prospects are much better than those of the market average.
By the same token, some companies may trade at an unjustified discount.
It is therefore a stock-picker’s market where experience and a worm’s-eye view are essential.”
For the more risk-averse, income-seeking investor, Mr Sumner says the US offers a transparent market that has shown great resilience both during and after the crisis. “US REITs are growing their dividends at a healthy rate — 10% a year for the next two years, in our view — enjoy the lowest cost of capital in a generation and face no threat from new supply.
“Asia-Pacific is a more volatile market with a lower percentage of REITs and has seen some spectacular recent performance. Nevertheless, the size of the Japanese stimulus package may send stocks higher still, and a return of normal levels of financial activity in the region would push stagnating office rents higher.
This is one for the more aggressive, short-term investor.
“In Europe, the economic outlook is not encouraging, but there are pockets of growth, notably in London office and retail rents, in one or two Scandinavian markets and in certain specific companies.
But at least there are some juicy dividend yields of 5% or so available from shopping centre specialists.
“This has been a defensive sector during the crisis and, even if there is little prospect of growth in the next couple of years, the dividend looks reasonably safe.”
Mr Sumner is positive about the South African sector and its yields — as well as the benefits the new REIT structure will bring — although he has the usual caveats of threats to the economy, the rand’s volatility and possible liquidity issues.
Although governance of the local sector is regarded as being good, macroeconomic challenges persist.
Source: BT
