Wednesday 11 December 2019

Real estate investors should take stock despite healthy outlook


In Ireland, prospects also look healthy for real estate returns this year. Stock image
In Ireland, prospects also look healthy for real estate returns this year. Stock image

Craig Wright

Global real estate markets have been on a great run in recent years - fuelled by a powerful cocktail of economic growth and ultra-low interest rates. Total returns have averaged roughly 8pc to 10pc per annum since 2010, according to the stock market index MSCI and the IPD property market index. We believe the outlook remains healthy in 2018.

Critically for real estate, global economic performance looks set to be strong this year, with upwardly-revised forecasts suggesting GDP growth of 3.9pc - the highest level since 2011. Regionally, the US and emerging markets are expected to grow fastest, although the above-trend growth rates in mature European countries should also support increased cash flows from real estate assets.

In Ireland, prospects also look healthy for real estate returns this year with forecasts suggesting economic growth will reach 3.6pc. Indeed, business group Ibec believes the strength of domestic demand and global growth drivers are strong enough to offset potential negative implications from Brexit in the near term.

However, higher economic growth rates are leading to a gradual withdrawal of central bank stimulus packages. Long-term US treasury yields are up to 2.5pc following tightening at the Federal Reserve. There have been interest rate hikes in Britain. Still, there are few signs of US and European central bank inflation targets being exceeded which is good for property as it means less likelihood of interest rate rises - which means property is cheaper to fund and thus supportive of the real estate market. On the basis of these expectations, global directly invested real estate (that is, investment in actual buildings) is anticipated to produce attractive total returns of mid-to-high single digits in 2018.

Consequently, at this point in the real estate market cycle, investors might consider the benefits of looking more broadly at accessing the best markets globally, spreading risk amongst them. One push factor for taking this stance might be the slowing nature of returns and changing risks in an investor's domestic market. Commercial real estate total returns in Ireland have already rebounded strongly, returning around 130pc over the last five years, according to MSCI/IPD. This trend is gradually slowing and the risks are also evolving.

Commentators believe that Brexit adds to uncertainty for the Irish market. While occupational demand has received tailwinds from banking and financial services sectors, a slower rate of growth in Britain will have downside implications for Ireland. In addition, the stamp duty changes in the recent Budget (where stamp duty on commercial property transactions was tripled) and the oscillating border discussions are further reasons for investor caution.

Considering the alternatives, we believe that globally logistics, such as distribution warehouse assets, will produce attractive returns in the medium term. Meanwhile, selectively targeting global office markets with the best fundamentals still offers some investment upside in an extended global economic upswing.

We are generally more cautious on the outlook for certain formats of retail which have lost touch with the requirements of local consumers, whilst some secular investment strategies in sectors such as hotels, residential and student accommodation also offer opportunities in specific global markets.

Craig Wright is senior real estate investment analyst with Aberdeen Standard Investments

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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