US offering best property investment returns as global recovery expected to be steady but slow

Written by Ray Clancy

Thursday, 03 June 2010 10:00

Global propery fundamentals are still on average in the early stage of recovery but investment values have rebounded for the best properties with the US currently offering the most attractive returns, it is claimed.

The recovery could last for several years due to economic uncertainty and the threat of inflation but there are many positive aspects to property markets, according to Patrick Sumner, portfolio manager of Henderson Global Property Companies Limited.

‘Most property companies around the world, Real Estate Investment Trusts (REITs) or otherwise, are in reasonable financial condition, having repaired their balance sheets, where necessary, with fresh equity,’ he said.

There has been a remarkable rebound in the performance of property shares over the past year with the global index in sterling showing a 12 month total return of 45%, but although this only puts them back at the pre-Lehman level, the financial markets are working again for most REITs, he explained.

‘The star performer so far this year has been the US, with a total return of 25% in sterling. The UK by contrast has lost 9%, the rest of Europe 11%, dragged down in part by the currency, while the Asia-Pacific region is more or less flat. However, the effect of currency has had a marked effect, with sterling losing 11% of its value against the dollar,’ said Sumner.

‘The US property market is much larger and more diverse than the UK’s, but the economy is clearly recovering at a different pace. The investment market indicators show the same sort of performance as in the UK, and tenant demand is similarly weak, except in the main financial office market of Manhattan. But, just like London, the activity is driven more by reorganisation and a shortage of new office space than by any strong employment growth - so far,’ he added.

The key factors behind the pricing of US REITs are the positive inflows into REIT funds, some institutional allocations and short-covering, he believes. There are few investment opportunities, but REITs are well placed to compete for them, because they are not over-leveraged and have access to both equity and debt at rates that can make acquisitions accretive in both income and NAV terms.

‘The worries about the huge volumes of debt that need to be refinanced, both in the US and in the UK, are clearly holding back some investors but others appreciate that the effects will not be symmetrical. In other words, there will be some big losers, but some winners also,’ explained Sumner.

In the UK it’s mainly about London. ‘There is rental growth in the office sector and we will soon see the start of some speculative office development to take advantage of an expected shortage in 2013 and beyond. In the absence of bank finance for developments, it is only those with existing planning permissions, substantial balance sheets and development skills that will press the button, and these are mainly REITs,’ Sumner added. Other areas of interest include the better retail sectors such as prime shopping centres and retail parks.

In Continental Europe the main interest is shopping centres and markets, usually regarded as a growth story, have lagged. He pointed out that the policy tightening in China, designed to curb the residential property boom, has led to significant under-performance by Hong Kong property stocks this year. Only Japan has kept pace with the global average.