real estate investment strategies pol r. tansens – march 2012
TRANSCRIPT
Real Estate Investment Strategies
Pol R. Tansens – March 2012
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asiab) Different property driversc) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?a) Residential marketsb) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Major signals to real estate investors
a) Still negative real interest rates (inflation!), especially in Asia
Making property investments popular to combat inflationMaking property investments popular to combat inflation
Negative real interest ratesNegative real interest rates
Real interest rates 5-Mar-123-month 10-year CPI (y-on-y)
United States -2.41 -0.80 2.90
Euro zone (Germany) -1.66 -0.22 2.10
China -2.13 0.32 3.20
Hong Kong -5.70 -4.26 6.10
Philippines -0.69 -0.95 3.90Singapore -4.40 -2.78 4.80
Brazil 2.81 6.39 6.22Source: Bloomberg
Pol Tansens - March 2012
Major signals to real estate investors
1Demand-pull inflation: inflation stemming from stronger demand for products and services, normally leading to higher revenues (rents)
2Cost-push inflation: inflation stemming from higher commodity prices (pushing up interest rates – thus funding costs - without necessarily producing higher rents in exchange)
Real estate and inflation perspectivesReal estate and inflation perspectives
Values and rents tend to be correlated with demand-pull inflation1, enhancing returns on equity
But cost-push inflation2 may have an adverse impact on real estate financing
If you have access to debt today “if” , rates are (still) reasonable
It is time to secure the cost of funding !
Pol Tansens - March 2012
Major signals sent to real estate investors
b) Different property drivers
Mature countries
Concerns over growth prospects for rents and capital values
In particular for the office markets
Currency risk – which is rather new – for EUR/USD/GBP denominated investments
But prime products – whether residential or commercial – are heavily sought after
Emerging countries
Better growth prospects for rents and capital values
For commercial and affordable residential real estate
Not only in Asia, but also in Latin America
But luxury home prices may cool off due to tightening measures
Pol Tansens - March 2012
Major signals sent to real estate investors
C) Stock market volatility
Real estate securities were very volatile in 2011, which does not necessarily reflect the health of the underlying property markets
Sentiment for real estate securities was particularly negative in Asia•Given current and projected inflation rates•Given government measures to cool the markets
Pol Tansens - March 2012
Major signals sent to real estate investors
Returns in the long run (source: EPRA, total return = share price performance + dividends, expressed in local currency)
Asset Classes (EUR) - 12 January 2012 Ytd return (%) 10-year annual return (%) 20-year annual return (%)
Global Listed Real Estate 6.9 6.0 9.0Global Equities (FTSE) 4.7 3.8 NAGlobal Bonds (JP Morgan) 0.6 4.4 6.0European Real Estate 4.6 5.2 6.9North American Real Estate 5.5 6.5 12.6Asian Real Estate 10.1 5.8 6.9Source: EPRA - All figures expressed in euros
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asiab) Different property drivers c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?a) Residential marketsb) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Real estate becomes increasingly polarised
The real estate investment world is getting increasingly ‘polarised’
Leading to substantial differences in (expected) performances
Asia and Latin America
Offices
Examples: Paris, London, New York
Europe and the US
Retail
Between mature and emerging marketsBetween mature and emerging markets
Between the various property sectorsBetween the various property sectors
Within each sub-marketWithin each sub-market
vs.vs.
vs.vs.
Pol Tansens - March 2012
Real estate increasingly polarised
Excessive leverage (coupled with re-financing issues)
Excessive oversupplyProperty asset classes which are
currently “underperforming’’
This process may take several years. Examples:
•Residential assets along the Spanish costas, Ireland, specific areas in the US
•Secondary office buildings across the world (subject to re-development)
On the one hand, the world is getting rid of On the one hand, the world is getting rid of
Which are considered as good alternatives to other (often lower-yielding) asset classes
Examples•Energy-efficient buildings (the ‘green’ revolution) across the world
•Secured-cash flow prime commercial buildings across the world
•Residential assets in specific mature and emerging countries alike (Benelux, France, Switzerland, Brazil, Asian countries, …)
On the other hand, the world is progressively investing in the ‘right’ asset classes
On the other hand, the world is progressively investing in the ‘right’ asset classes
Pol Tansens - March 2012
Real estate increasingly polarised
The dichotomy between prime1 and secondary markets is widening, with:
• Significant investor demand for prime product that is often difficult to find
Leading to lower gross initial yields (capitalisation rates)
• Secondary buildings gradually being phased out of specific markets Leading to higher gross initial yields
• The search for energy-efficient buildings (Are tenants willing to accept higher rents – How can the green advantages be quantified properly?)
1Prime markets refers to market composed of best-quality buildings, located in top locations.
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asiab) Different property drivers c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?a) Residential marketsb) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Where to invest today within the Real Estate universe?
Profile AgeInvestment
strategyEnvironmenta
l criteriaOccupatio
nAsset
type/location
Lower risk
• Existing asset• Core
• Core+
• Different environmental criteria
• Rented (remaining lease duration)
• Prime
Higher risk
• Development project
• Assets under re-structuring
• Value-added
• Opportunistic
• High energy consumption
• No label or green certificate
• High vacancy rate
• Secondary
General rule:
We should be at the right side of the investment universe!
General rule:
We should be at the right side of the investment universe!
Pol Tansens - March 2012
Where to invest today? Residential real estate
Mature countriesWe have a choice between ‘good’ and ‘bad’
markets !•Some ‘good’ markets are still relatively well
performing, and have barely noticed any crisis
• Specific areas in France, Belux, Switzerland, Scandinavia, the US …
•However, we expect capital gains to ease in the future
• Land values are important when considering residential investments
“Bad” markets are poorly performing•Specific areas in Spain, Ireland, Greece, the
Baltics, the US …
It may take another 5 years or so before the entire overhang will be digested
•So prices are low, but may stay low in the mid term
Emerging countries We have a choice between ‘luxury’ and
‘affordable’ markets
Investors seem to progressively favour ‘affordable’ housing
•Whether in Asia (South East Asia, India, …) or Latin America (Brazil)
•Indeed, the luxury segment has become very expensive, and may be subject to volatility
• Local authorities are attempting to cool off specific property markets
• Or economic conditions may suddenly deteriorate in the future
Pol Tansens - March 2012
Where to invest today ? Commercial real estate (1/2)
Emerging and mature markets alikeEmerging and mature markets alike
Investments should be made in prime assets (unless investors are willing to take substantially higher risks)
Offices – still the most important asset class – should be energy-efficientThe future is rather grim for existing stock
Retail is in many countries – but not in all countries - considered as less cyclicalEspecially in Continental Europe (due to strict planning regulations)
Although Logistics is cyclical, it carries a high cash yield today, which may be attractive
Although return expectations should not be overestimated in the near future, we think they will remain acceptable to investors
Pol Tansens - March 2012
Return perspectives for commercial real estate (2/2)
Mature countries
We are expecting
Capital value growth in line with, or slightly above inflation expectations (2% or so) – yield compression has finished
Stable headline rents, which are ‘mildly’ indexed
Effective rents may be lower as landlords are aggressively marketing to reduce vacancy rates in some markets
Emerging countries
We are expecting
Higher growth in capital values for prime properties, given the strong (international) investment demand
Modestly rising headline rents
Consequently, return on equity – after reasonable gearing (50%) –
should be in the region of 7% for 2012
Consequently, return on equity – after reasonable gearing (50%) –
should be in the region of 7% for 2012
Consequently, return on equity – after reasonable gearing – should be in the region of 10-
15% for 2012
Consequently, return on equity – after reasonable gearing – should be in the region of 10-
15% for 2012
Pol Tansens - March 2012
Return perspectives for residential real estate
Mature countriesWe are expecting
Slowing growth in prime housing prices, although core markets are expected to report positive returns
Still difficult situation for problematic areas
Emerging countries
We are expecting
Stabilising luxury housing prices
Growth in middle-income housing prices
Consequently, return on equity – after reasonable gearing (50%) –
should be in the region of minus 10 to plus
5% for 2012
Consequently, return on equity – after reasonable gearing (50%) –
should be in the region of minus 10 to plus
5% for 2012
Consequently, return on equity – after reasonable gearing –
should be in the region of plus 0-15% for 2012
Consequently, return on equity – after reasonable gearing –
should be in the region of plus 0-15% for 2012
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asiab) Different property drivers c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?a) Residential marketsb) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Conclusions
The world is sending major signals to real estate investors. Real interest rates are negative in many areas, and property drivers are different across the globe
As a result, global real estate is increasingly subject to polarisation. Consequently, investors should be advised to be at the right side of the investment universe
For residential real estate in the mature markets, investments should be made in these areas considered as being ‘good’ . Poorly performing markets are rather cheap, but may remain inexpensive for a longer while. In the emerging markets, investors are increasingly favouring affordable housing development schemes
For commercial real estate – whether located in the mature or the emerging markets – investments should be predominantly ‘prime’ (unless investors are willing to take substantially higher risks)
Pol Tansens - March 2012
Thank you for listening !
Pol R. TansensHead of Real Estate Investment Stategy