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#Real Estate — 11.12.2018

Do The World’s Listed Real-Estate Markets Still Offer Attractive Yields?

Pol Robert Tansens

Discover our new Real Estate report : “Real Estate And Inflation: Not Necessarily A Bad Combination!”

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Listed real-estate markets are no longer what they were and the golden years seem to be something of the past. We have already explained in previous reports that growth in total returns (gross dividend + change in share price) on REITs would decrease.

This year has not been amazing, with total returns varying greatly. However, it is not all pain and suffering. Germany has performed relatively well, posting a 9% return year-to-date (as at 2 October), which contrasts sharply with France, and the United Kingdom (in pound sterling). Asia and North America have also had better times

That said, many regions generated attractive returns over a longer period, for instance five years. Only Asia was lagging behind. Europe scored brilliantly over the period under review, with Germany shining as the absolute leader

A word on UK REITs. The Central London real-estate market has remained reasonably calm with valuations underpinned by cheap money and overseas capital in the past few years. This has allowed UK REITs to tidy things up, but “they are now largely priced out of the market, awaiting a correction” (source: Exane BNP Paribas Research, 23 July 2018). “Our positioning remains broadly neutral on London-exposed names despite low leverage (debt ratios of about 30%) and wide NAV discounts. Brexit weighs on future returns and it is too early to pay for a recovery trade that may not materialise.”

The United States has higher nominal interest rates than other parts of the world, such as Europe and Asia. This has resulted in REIT share price volatility in recent months, although total returns remain acceptable (certainly in the long term) as the dollar has appreciated against major currencies as well

We are of the opinion that investors should not be concerned about the US because there is no real empirical evidence that inflation is negatively correlated with the long-term performance of REIT share prices. After all, if nominal interest rates were to rise due to unexpected core inflation, rents and values would also rise (after a time lag). In addition, this applies not only to the United States, but to all REIT core markets.

Asia is a vast region, with many listed REITs (Singapore, Hong Kong and Japan are well-established REIT markets). Volatility seems to be higher than in other markets, while unfortunately total returns do not necessarily compensate for additional risks.

« From an absolute total return perspective, we do not expect a fat total return over the next three years. Only a few percent, generated mainly by dividends. However, from a relative investment perspective, total returns are expected to exceed those of other asset classes, particularly fixed-income securities. We therefore believe that many investors will still be attracted to REITs in general, and that they will adopt a buy-and-hold strategy.»

Pol Robert Tansens

Head of Real Estate Investment Strategy