Potential returns and diversification benefits, the real estate market has a lot to offer as an investment asset class, so much so that, after the worst repercussions of the global financial crisis, investors have started to find value and opportunities again in various parts of the world .
Four investment experts from the Natixis Global Asset Management group therefore decided to share their views on the short-term scenario of the sector, and on the markets where they think the recovery is strengthening.
On the US market – begins Michael Acton, Research Director of AEW Capital Management – the prospects for REITs (Real Estate Investment Trusts) will continue to improve in the second half of the year.
Thanks to what it calls “the most significant change of course in terms of monetary policy in the United States in recent decades” and the resulting strengthening of economic activity, REITs can take advantage of a particularly favorable environment. In fact, recalls Acton, the real estate market is closely linked to the performance of local economies, with mutually reinforcing effects given that each home generates over 50.000 USD for the communities in which it is located, as a consequence of the greater need for goods and services (according to the estimates of the National Association of Real Estate Agents).
But there are other positive signs – continues Acton – including one that has gone almost unnoticed: the strong improvement in the budgetary position of the federal government. While remaining high, the deficit has nearly halved from last year, as reported by the US Congressional Budget Office (CBO), and is expected to remain relatively stable over the next two years.
Demand should be supported by the entry onto the market of approximately 2.000.000 new families, formed between 2007 and 2011 and currently looking for a home, and also, due to its close links with the housing sector, also the storage sector could perform well.
From a geographical point of view - concludes the expert - by the end of this decade, having achieved energy independence, it is expected that the US will become a net exporter of oil and, perhaps, also of natural gas. From this perspective, a potential opportunity emerges in areas characterized by a significant presence of energy sources, ventures Acton.
As expectations on bid and offer prices converge – Sam Martin, Director of Research and Strategy at AEW Europe takes the floor – an increase in investment volumes is also expected in the European countries affected by the debt crisis. The improved availability of debt financing, also supported by the persistence of extremely low interbank rates and five-year swap rates, should contribute to the increase in real estate investment activity in 2013. However - warns Martin - it is probable that the demand for local for office use in Europe will remain low in the short term, considering the continuation of the recession in many European countries.
Pricing considerations are echoed by Dmitri Rabin, Senior Securitized Asset Analyst at Loomis, Sayles & Company. With reference to the US market, Rabin points out that until April 2013 house prices rose by 11,9% according to the findings of the CoreLogic® Home Price Index Report (which excludes sales related to non-performing loans), increases with a broad basis, having covered 49 out of 50 states, and not purely seasonal. Furthermore, - Rabin points out - it should be noted that even after the recent increases, the price of houses in the United States, nationwide, is still 22% below the maximum prices. So there is a lot of room for improvement.
As far as rates are concerned, the expert observes that the thirty-year fixed rate on mortgages has recorded a significant increase, which entails a forecast increase of 10%-15% in the monthly payment paid by new borrowers. However, Rabin reassures, the repayment capacity of home loans should not be affected "even if the price of houses still increased by 10% and mortgage rates rose by 2%" remaining roughly in line with that of the period 1981-2010. In fact – the analyst goes on to explain – the growth in interest rates and the repayment capacity have not proved to be valid indicators for predicting the trend in house prices. It is considered much more useful to refer to the balance between supply and demand, which paints a very favorable picture given that the value of empty structures is close to historical lows.
The US market is probably experiencing a phase of awakening after a long period of adjustment – explains Philippe Waechter, Chief Economist Natixis Asset Management – and the contribution of real estate investment to GDP is now positive. However, the recovery of home loans in the US, China and Europe is progressing at different paces.
In China, the link between economic activity and real estate growth weakened after 2009, resulting in different levels of activity in different parts of the country. The greatest risks are found in cities such as Beijing, Shanghai, Shenzhen and Guangzhou, where there is still a strong demand which is countered by little or no capacity to build. According to Waechter, these markets could become more speculative because they are already saturated and therefore subject to strong corrections if the central bank's policy becomes more restrictive. The situation of smaller Chinese cities with populations of less than one million is also dangerous. Here, almost the opposite of before, there is an oversupply of housing, moreover financed by the shadow banking system. The combination of these factors – believes Waechter – could be the cause of much suffering.
Finally, in Europe, the geographical distribution is relevant, although the real estate market is trying to regain momentum in most countries. Property prices are falling in 8 out of 14 countries, for example in Spain, Italy, France and Ireland, but are rising in Estonia, Luxembourg, Malta, Belgium and Finland. The United Kingdom is the strongest market, although – Waechter points out – there are still no signs of a strong recovery.
As a note of caution, the risks and costs involved in real estate investment are repeatedly pointed out. Although the collapse in yields of most risky asset classes (as a result of government financial policies and expansionary monetary policy measures) has made real estate a relatively attractive investment proposition, investors should be aware of the risks in which incur, including lower liquidity and fluctuating asset values.
“Real estate assets are capital-intensive assets. Those who invest in them - concludes Michael Acton - use a significant financial leverage and, obviously, this also affects the associated costs".
