Crystal ball

Real estate to benefit from improving fundamentals and attractive valuations, says ING IM

Fri, 21/03/2014 - 14:31

After a disappointing 2013, returns on real estate have overtaken equity returns by a wide margin on a year-to-date basis, according to ING Investment Management International.

Patrick Moonen, senior strategist at ING IM, says: “Year-to-date, real estate equities are the best performing asset class at 7.3 per cent positive return. In the US, Europe and Japan, real estate is outperforming equities.
 
“The strong year-to-date performance of real estate is not a big surprise to us, as the environment has improved in recent months. An improving global macroeconomic backdrop, illustrated by increasing real estate prices and transactions is combined with relatively stable or even declining global bond yields. Next to that valuations are supportive as real estate offers a yield uptick relative to bonds.”
 
ING IM notes that the biggest percentage increase in transactions up until September 2013 was visible in the peripheral countries of the Eurozone. Furthermore, prices are moving up, not only in residential real estate in the US but also in the prime commercial real estate market in the UK and Germany.
 
In terms of debt markets, the investment manager believes they are opening up and lenders are prepared to move up the risk curve. For REITs, this means that they are able to refinance themselves at lower rates.
 
Moonen says: “The real estate dividend yield offers a nice pick-up relative to both government bond yields and corporate bond yields for yield-hungry investors. At the same time, global real estate holdings in institutional portfolios are still at low levels.
 
“However, the main risk for real estate would be a strong, unwarranted increase in bond yields, although we should not overestimate this risk. First, real estate offers an additional yield that acts as a buffer against a rise in bond yields. Second, the strategic game plan of global central banks will keep the upward pressure on bond yields limited over the coming months.
 
“Third, the improvement in macroeconomic data will have its effect on rental growth. This is influenced by inflation as rents are indexed; vacancy rates which are declining; economic growth which is improving and the quality of the real estate portfolio. It is difficult to make an overall assessment of this as real estate remains a local business with very different niches having different dynamics.”
 
ING IM currently has a small overweight position in Eurozone real estate. This partly based on relative valuations as the sector trades on a large discount both on a relative price-earnings ratio (PE) as well as on a relative price-to-book ratio (PB) yet the dividend yield is approximately 25 per cent above the global average.
 
Overall, ING IM holds an overweight position in global real estate equities.
 
Moonen says: “Although weather-related distortions in the US and Japan might continue to create some confusion over the underlying growth momentum, the near-term risk of a negative feedback loop into the global business cycle has come down. A fundamental re-assessment of the growth outlook does not seem justified at this stage. This may create new investment opportunities.”


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