Real estate investors stand to benefit from rental growth and higher returns, it is claimed

In a world of relatively modest yields from most assets, where interest rates are generally anticipated to be lower for longer, and international economies are slowly recovering, investors should consider how global real estate could fit into their portfolios, it is claimed.

Future supply remains constrained in many property markets and there is often a low level of empty good quality buildings, while improvements in tenant confidence is translating into increased occupier activity and demand for space, according to Simon Kinnie, senior investment analyst at Standard Life Investments.

He points out that such a situation is generally a precursor for rental growth and hence higher future returns. ‘All in all, we consider investors can reasonably expect a relatively secure and stable income in the region of 5 to 8% a year, on average, globally, over the next few years, with total returns approaching double digit on the key assumption of continued global economic expansion,’ he said.

‘As ever, caveat emptor'(or buyer beware) applies. Location, location, location matters for real estate, where quality can vary widely from building to building, city to city. Within each of the three main real estate regions of Europe, the Americas and Asia, performance is expected to vary widely,’ he explained.

‘For example, although much of Europe is seeing improving economic conditions, and consequently increased occupier confidence and demand for space, this is not the case in most of the peripheral European markets. Many such cities are already suffering from a high level of empty space and modest demand, alongside the possibility of sovereign default. The prospects for property in, say, Portugal, Ireland and Greece remain poor, for Paris much superior,’ he added.

Similarly, in the Americas there are a range of expectations. ‘The highly cyclical office centres, such as New York, Boston, Seattle or Sao Paolo, have benefitted from improving global growth. In line with other markets, occupiers who need to move are generally faced with limited options for new good quality space. Future returns are expected to be elevated in these markets,’ said Kinnie.

‘However, selectivity is key in the North American market. Some cities, such as the industrial centres in Montreal and Vancouver, have a large amount of current supply while demand is expected to be limited due to structural problems,’ he added.

It is a similar picture in Asia. ‘Polarisation is the watchword. Although emerging markets are expected to grow strongly in the years ahead, future supply is generally more elevated across the region, particularly in China. Given the measures being taken by its government to slow the economy, excess supply in many areas suggests poor returns from real estate in many areas, for example China Residential and China Logistics generally and Shenzhen Offices specifically. On the other hand, the real estate fundamentals and dynamics look much more favourable in some parts of Australia, specifically offices in Perth and Melbourne,’ he pointed out.

‘At this point in the economic cycle with global economic growth gradually improving and most asset class yields generally remaining relatively modest, investors can benefit from the attractive attributes which global real estate can add to a diversified, multi asset portfolio. In many countries, a secure and steady income yield of 5 to8% a year will be attractive, while constraints on future supply should provide investors with some comfort if inflation becomes elevated. However, careful selection of markets and individual assets remains paramount,’ he added.