How to invest in property in global 'winning cities'?
Investors correctly assume there is something very appealing about some of the world’s most prominent cities, often referred to as ‘gateway’ cities. These cities are experiencing rapid population growth and increasing affluence, attracting both capital and highly skilled employees on an increasingly international basis.
However, we are concerned about the approach typically taken by property investors. Such investors often specify that they have low risk tolerance and that they are long-term investors. However, they appear to take a much higher level of risk by focusing on the office sector exclusively, encouraged by the ease and familiarity of investing in this sector. The office sector has significantly underperformed over the longer term, suffering from high levels of speculative development, high capex requirements and depreciation rates, a particularly volatile rental cycle and yields often forced down to unjustifiably low levels by huge inflows of international capital.
Rapid population growth and increasing affluence create strong opportunities in the retail, residential and logistics sectors, which have delivered stronger performance and lower volatility than the office sector. We would urge international investors to consider these sectors rather than focusing solely on offices.
It will take a considerable time for the UK to extricate itself from the European Union (EU), and it is very uncertain what form this will take, although a ‘harder’ Brexit is currently looking more likely. Even before Brexit, the UK property market – and especially London offices – was already considerably overpriced.
Homing in on residential property for your portfolio
The market for institutional residential rental property (large apartment blocks also known as multi-family property) exists in only a few markets, namely the US, Japan and parts of Europe. However, global investment interest is growing as asset allocators recognise the sector’s potential to deliver not only diversification but also high risk-adjusted returns.
Maximising income is the key to delivering strong residential returns
Aberdeen believes that income, and the management and growth of that income, is key to successful long-term property investment performance. Europe’s residential sector offers very secure income compared with the commercial sectors, although that income return is relatively low.
We see German residential property as close to fundamental value at a national level. While construction activity is increasing at a national level, demand is outstripping supply. With exceptionally low yields on government bonds, quantitative easing (QE) looks set to increase prices in the short term. We view the German rental sector as very attractive for long-term investors.
De-risking Asian property and accessing its growth
Property investing risks in Asia Pacific’s developed markets are similar to Europe and North America while also offering investors exposure to high potential growth. Developed APAC markets are becoming less risky due to rapid growth in the number of large financially strong local corporates. Matching the expansion of the occupier base, there is a structural rise in domestic institutional capital which is translating into rising demand for APAC’s income-producing property. This is an important development that creates property market depth, and gives overseas investors multiple exit options when they seek to sell.
Some of the best and more investible opportunities in Austria are in logistics and dominant well-anchored retail parks. There is a pronounced lack of high quality logistics stock in Austria and vacancy rates for such stock are very low. Dominant well-anchored retail parks have attractive yields and offer some potential for rental growth from a relatively low rental base. We also like retail assets on the prime pitches of the ‘Golden U’ in Vienna, which offer opportunities for strong rental growth; stock is very rarely traded, though. Prime offices are very expensive and office rental growth has been very weak over the long term.
Healthy public finances, stable political environments, limited structural risks, clearly defined property rights and low levels of corruption are some of the reasons why investors consider the Nordic property market to be safer. While the four countries have similarities in their social, economic and political systems, each country has its own main industries, which makes economic performance less synchronised. The Nordic region is the fourth largest property investment market in Europe and has made significant improvements in terms of transparency, professionalism and liquidity over the past decade.
India presents a strong opportunity for global property investors but it is not a low risk option. That said, it is now more balanced and there are greater investment options than in 2005 when the market was first opened to offshore capital. We believe that income-producing offices in strong market locations offer the lowest risk investment opportunity over the next five years. A housing development strategy focused on the expanding middleclass population is also appealing, given a defined exit strategy based upon sales to end users. However, sourcing land for residential projects is becoming more difficult in major cities. We expect greater opportunities to emerge for middle-class housing as reputable developers enter the market in greater numbers, attracted by the sector’s ability to generate sustained sales.
Europe’s investible residential landscape Demand for private rented residential is very positive, particularly in the Nordic capitals, major German cities, London and Amsterdam. Strong population growth, later marriage, shrinking household size and the sheer cost of buying in some markets have all contributed to demand while development levels are not keeping up with demand growth. Pricing and affordability vary considerably across Europe, while Germany stands out as the largest investible residential market in Europe by far. Private rented apartments have considerable cross-border similarities and the operational skills are likely to be interchangeable across countries. Accessing stock is likely to prove competitive but forward-funding developments are a potential solution for investors.
Continental drift: Why US capital is drifting towards European real estate
US real estate capital is drifting towards European real estate in search of new opportunities and we think for good reason. European markets look attractive from a fundamental value perspective and, as such, should offer higher projected returns. As the macroeconomic conditions improve across the Eurozone, accompanied by attractive valuations, opportunities should arise offering attractive risk-adjusted returns that can be the hallmark of long-term value investing. In the absence of complete foresight and respecting that regional leadership in returns tends to vary over time, we believe European real estate offers US investors a compelling investment opportunity to de-risk portfolios.
How will the oil crash affect real estate markets?
The sharp and unexpected crash in the oil price has had an impact on all asset classes. With Brent crude having fallen below USD50, the IMF has issued a warning that deflation, not inflation, is now the greatest threat to the world economy. The fall in the energy price is the biggest single contributor to deflationary pressures. This report looks at the impact of low oil prices on global real estate markets, with a special focus on Norway - Europe’s largest oil producer.
German residential property remains close to fundamental value and we continue to see good value in the sector, although local market knowledge and good stock selection remain essential. A lack of residential supply in Germany’s key cities is forcing rents higher for new builds and existing stock. Short and longer-term drivers for rent and capital growth are good overall, but vary considerably between local markets. Given the further pressure quantitative easing will bring to institutional property investment markets, a further increase in values is likely.
This paper looks at four types of land: Agriculture, Forestry, Ground Rents and Strategic Land (for development). Of the types of land analysed, Agricultural land appears to offer the most potential for conservative, income focused, European investors. Strategic land offers the potential for much stronger returns, and is more suited to opportunistic or very long-term investors. Forestry on its own is unviable as a major investment opportunity as it is a relatively small investment segment where assets are typically tightly held, with lot sizes that are small scale in nature. Ground rents are an extremely secure form of income with additional benefits in the form of ancillary income from property services and lease extensions.
Against the risk of Australian house prices becoming overpriced, we believe institutional investors should tap into growing medium-term housing demand by debt funding new development. Debt funding of developers is relatively low risk due to pre-sale requirements to de-risk projects. Equity participation in development is higher risk due to its greater vulnerability to a market downturn, and is our least preferred option for investing into the residential market.
How to invest in property in global 'winning cities'
The world’s most prominent cities are experiencing rapid population growth and increasing affluence, attracting both capital and highly skilled employees on an increasingly international basis. This has created strong opportunities in the retail, residential and logistics sectors, which have delivered stronger performance and lower volatility than the office sector.
German residential Q1 2014: is talk of bubbles just hot air?
Whilst the recent growth in the German residential market is strong within a historic context, our broad conclusion is that the market is close to fair value and certainly not markedly overpriced. Demographic trends, especially in the major cities, are strong and improving, German household finances are robust and development levels are not keeping up with demand.
Navigating Spain’s pain; is there value for core investors?
Despite compelling value in the Spanish property market in aggregate, core property opportunities are more limited and better opportunities may lie in the value-added and opportunistic spheres, although local expertise is required and many non-locals are likely to be inadequately resourced.