Property update: Where are the global hotspots?
In property markets, the negative economic backdrop is undermining rental growth, suggests First State’s Marco van Bussel.
The banking sector is reluctant to offer finance and real estate markets are generally sluggish. However, on the positive side, development pipelines are limited and in some markets rents are increasing, although they are likely to be contained going forward as real estate normally lags the real economy.
Despite the crisis engulfing the eurozone, the picture across European property markets is mixed. Demand for German residential property and all sectors in Switzerland remains high.
In Sweden, the office and retail space is reasonable. However, city markets like Paris, Brussels, and Amsterdam are facing some headwinds. The UK is mixed, with London in relatively good health, although we anticipate that job losses in the financial sector will have a negative effect. Demand for new development sites and rental levels are likely to be impacted by a subdued UK economy.
In the US there is significant variation across regions and sectors. Occupancy rates in more cyclical areas, like industrials, are falling, while the multifamily and office sectors are stable. As in Europe there is a lack of new supply in commercial property that is offsetting weakness in demand. In line with other regions, there is subdued demand for secondary assets in the office and retail segments which is likely to continue in the current economic climate.
In the Asian market, China has been hit by concerns about oversupply in residential property and by government tightening measures to deflate a possible housing bubble. In Hong Kong and Singapore there is a more positive backdrop with economies showing relative stability and unemployment remaining low.
However, demand is slowing in the office segment which will negatively impact rental levels in the future, although the high-end retail market is still very strong.
At a stock level, we are particularly positive about the prospects for Simon Property (US), Mirvac Group (Australia) and Digital Realty Trust (US). Simon Property has a high quality mall and premium outlet portfolio and continues to find positive redevelopment opportunities.
Mirvac has exposure to residential development, commercial/office development and stable income from an office and retail portfolio. Digital Realty is a Real Estate Investment Trust (REIT) benefitting from the secular growth of the internet and increased outsourcing of data centre usage.
The company continues to expand its global presence in both Asian and European markets with Singapore and Australia recent additions.
Marco van Bussel is co-manager of the First State Global Property Securities fund