Global real estate investment market on firm foundation but doubts linger over Asia

The global real estate market is on firm foundations, holding up well so far this year and can offer some protection against inflation for investors, it is claimed.

Opportunities abound in both developed and developing markets, according to Alan Supple, portfolio manager at Urdang, BNY Mellon's global real estate investment specialist, and a member of the team managing the BNY Mellon Global Property Securities Fund.

‘Despite the continued economic uncertainty, global equity markets have held up well so far this year, and the real estate securities markets have similarly remained relatively stable. Global and US real estate investment trusts (REITs) have generated positive returns, as real estate fundamentals continue to improve and investment in the asset class increases,’ he said.

‘How is it possible that the real estate market seems to be shrugging off these major world shocks? The answer, we believe, is in a combination of investors' need for income, and a desire to protect themselves from the ravages of inflation,’ he explained.

‘Investors are taking on greater risks in the hope of producing higher returns in what is, and is likely to remain, a low-yielding market environment. Fuelled by the US Federal Reserve's quantitative easing programme, capital is coming to market in a very big way, and the result is that the global market's appetite for risk is up across nearly all asset classes, particularly hard assets such as real estate,’ he added.

He believes that with short term US Treasury rates hovering near to zero, economic conditions favour high dividend paying stocks, which often benefit from investors' search for income generating assets.
Meanwhile, REITs benefit from having a low correlation with most other asset classes, while they can also provide a diversified source of returns, and, of course, have the potential to deliver attractive levels of capital appreciation, he added.

‘Within the global real estate market, in those low to modest growth markets which include the US, UK and Europe, we expect rent and vacancy rates to continue to improve. We also expect that speculative commercial development will remain tempered and that buying opportunities may emerge as banks come to terms with deferred reinvestment decisions. As a result, we maintain a positive outlook on returns for real estate in 2011,’ said Supple.

But investors should, however, remain cautious, he warns. ‘While we do not expect a double dip recession, we believe that austerity measures could threaten GDP growth in the second half of the year and affect real estate returns,’ he said.

Meanwhile, in high growth markets such as Asia and South America, he believes that investors may find compelling opportunities, supported by both strong economic growth and their demographic models. ‘However, investors in these markets should be wary of inflation risks, uncomfortable levels of currency appreciation and volatility as a result of government-supported inflation fighting policies,’ he added.