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House and money

Double-digit growth in US and UK drives global real estate performance, says IPD

The IPD Global Annual Property Index recorded a total return of 8.3 per cent for 2013, driven by double-digit growth in the US and UK and reinforced by good performance in commodity-rich Australia, Canada and South Africa. 

2013 was the fourth consecutive year of strong real estate performance. 

Despite this good recent performance, values remain 15.0 per cent below 2007, and over ten countries, all of which are in Europe, continued to experience value declines during the year.

The performance of the direct real estate market compares favourably with government bonds that posted negative returns, but fall well short of the near 30 per cent returns for global equities of the MSCI ACWI.  

“These results are not surprising, with real estate often falling between the generally higher performing but more volatile equity markets and the more stable but lower returning bond markets,” says Peter Hobbs, managing director and head of research, IPD.  

Over the long term, real estate has tended to generate attractive risk adjusted returns compared with equities and bonds driven by the relatively high income returns for the asset class. Over the past decade, income has represented 83.0 per cent of the annual average 7.1 per cent total return.  

“This high income return is a major reason for the wave of capital headed to real estate,” says Sabina Kalyan, global chief economist at CBRE Global Investors.  “The asset class continues to be attractively placed, with still wide spreads between real estate and other asset classes. Despite this, there are increasing signs of aggressive pricing, whether in the compression of property yields or tightening of spreads with bond yields.”

As always there are significant variations across markets, property types and cities. There was a 15 per cent difference in the performance of the best performing South Africa (15.3 per cent) and worst performing Spain (-0.3 per cent), but the range of returns was almost as large within as between countries.  Within the US, Houston generated a return over 17.0 per cent, a full 10 per cent higher than Washington DC, and in the UK London (14.5 per cent) outperformed Edinburgh (8.5 per cent) by six percentage points. 
These sub-national variations can persist with dominant financial cities (such as London and New York), commodity-based cities (such as Calgary and Houston) and tech-cities (such as Boston and Seattle) tending to bounce back strongest since the financial crisis. 

Mark Clacy-Jones, vice president and head of core research, IPD, says: “It is these variations that further contribute to the attractiveness of the asset class to investors. 

“Beyond helping diversify a multi-asset-class portfolio, our research demonstrates the significant diversification benefits within real estate, particularly when investing across global markets.” 

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