Approaching the property paradigm
Property as an asset class was dealt a harsh blow by the credit crunch and the global financial crisis.
Since then monetary policy has been injecting copious amounts of liquidity into the financial system to stave off systemic risk, leading to improved opportunities.
As real yields from so called risk free assets in the core eurozone hover around zero or even negative, investors continue to seek opportunities for capital appreciation and income from other sources.
For some the search leads to alternative asset classes and use of new types of instruments to manage risk and return. However, there is a long standing asset class that has staged a significant comeback since the global financial crisis: property.
Figures from IPD, the provider of property (real estate) indices that is now part of MSCI, illustrate the possibilities. In October this year it said annualised return from UK logistics property was 19.6% in the 12 months to June, as soaring online retail caused a sharp nrise in demand for distribution hubs close to transport nodes.
“Rental values have grown by 4.6% over eight quarters in the logistics sector as tenant demand grows and supply is constrained, with only 11 buildings greater than 300,000 sq ft available nationally,” IPD stated.
In March this year, the IPD German Annual Property Index for 2014 showed the highest total returns since the index was launched – 6% as both capital growth and income growth were positive, up from 5.3% in 2013. Total return from Switzerland was 5.3% in 2014. In the Nordic region it was 7%, and in France 6.3%.
Globally, property attracts: Norges Bank Investment Management at last count had 2.7% of its €758bn ‘oil fund’ invested in property, against 62.8% in equities and 34.5% in fixed income.
But it is opening a new office in Tokyo specifically to start investing in Asian property. Hermes Investment Management is involved in property development around London’s Kings Cross railway station, which will provide work and living space for some 45,000 people.
As a 20 year project this may be risky, but then over at Aviva Investors analysts have predicted return from all property in the UK to average 8% annually in the period 2015-2019. UK gilts are currently yielding about 1.8%.
And unlike concerns around asset classes such as emerging market equities or debt, when Standard Life Investments recently analysed the effects of any US Federal Reserve interest rate hike, it concluded that “over the medium term, commercial real estate should continue to post competitive returns versus other asset classes.”
Speaking further about property at the recent InvestmentEurope Autumn Pan-European Fund Selector Summit were James Wilkinson, managing director and co-global CIO at BlackRock Real Estate Securities, and his colleague Steve Ralff, director and global product strategist.
They noted a total global property market of $27.6trn (€24.7trn), with listed property securities constituting a $3.1trn (€3.3trn) slice of this total.
Within that they identified a number of ways to access the asset class at different risk/return points. Perhaps most importantly, they noted that “historically, real estate has outperformed equities and bonds” and that property in the form of Reits represents an opportunity to tap into high earnings growth and dividend growth.
In terms of markets, they picked out the UK and the Nordics as the most favourable locations for property investors in Europe currently.
This is echoed by Wilson Magee, director of Franklin Global Real Estate and Infrastructure Securities Team at Franklin Real Asset Advisors. “Today we see opportunities to invest in companies in sectors such as Swedish offices, German rental apartments and high quality retail on the continent.
“Markets in Spain are clearly recovering and Italy is only a step behind Spain. In the UK, the London office market has strong rent growth and fundamentals are also positive for high quality retail and well-located industrial properties.”
George Lee, partner at Eclectica, added: “A couple of years ago, it was reported that Germany was facing a housing bubble so we went back and looked at it, and realised that it was one of the most compelling buy stories we had seen in a long time.”
“Given the current ECB monetary policy which is generating excess liquidity, we anticipate that asset prices in countries like Portugal or Spain will have to fall while asset prices in Germany will have to go up, which will also affect property prices, so investing in German residential property is really a play into European monetary policy.”