Real estate sell-off unjustified by fundamentals
The 6% sell-off in global real estate since the end November is unjustified by fundamentals.
Low interest rates and positive signals from the main drivers of real estate all indicate positive growth in real estate. US demand for real estate is set to rise further, contributing positively to GDP growth.
We also believe the US housing sector will perform well in 2016 and will contribute positively to the overall US GDP outlook. The case for real estate is supported by easing credit conditions, with US Treasury yields back below 2% and the German Bund yield firmly below 50 basis points.
The latest ECB bank lending survey also showed credit standards on loans to households, for house purchases returning to a net easing in Q4. Net loan demand for housing is also strengthening, driven by improving housing market prospects, increased consumer confidence and low interest rates.
The real estate sector is getting further support from unemployment declines in all regions and, with the exception of Japan, retail sales growing on a year-on-year basis. The demand for office space should also increase given the labour market trends, NN IP says.
From an investor point of view, real estate continues to offer attractive yields, especially compared to what is available elsewhere. Absolute cap rates, a commonly used factor to assess the profitability of real estate, are somewhat above average.
This should keep investors’ interest in the asset class alive. From a regional perspective, we prefer the Eurozone as the ECB is offering support and will, according to Mr Draghi, do more if needed. We expect more easing in March.
In the US, house price rises have moderated from unsustainably high levels but are still well-above the rise in disposable income, which may cause some pressure on affordability. However, lower unemployment will lead to an increase in household formation as children leave their parental homes and population growth will add around 1 million households per year.
Taking into account demolitions, this means approximately 1.4 to 1.5 million housing starts per year, which is three times the crisis level but still a quarter below the level we observed in 2005. The risk is on the upside.
Patrick Moonen (pictured), principal strategist Multi-Asset at NN Investment Partners