Real Estate Report : What type of strategy do we currently recommend?
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Our strategy for real-estate investors remains quite simple, even if market conditions are not straightforward.
We are convinced that investors must build a property portfolio that includes both listed real-estate and direct real-estate investments. Direct real estate may be purchased directly or indirectly, through a private real-estate fund. Property shares may be purchased either on the stock exchange or through a fund (or fund of funds) that, in turn, is invested in property shares or, more specifically, in real-estate investment trusts (REITs).
Any investment strategy needs to incorporate the investor's future liquidity needs, financial return expectations and investment horizon, and these parameters vary from one investor to the next.
What type of Real-Estate strategy do we currently recommend ?
Top-tiered markets are expensive at present, resulting in low gross initial yields (GIYS). In addition, it is far from certain that ‘the best’ markets would be more value-resistant than lower-tiered markets if market conditions deteriorate. Nonetheless, we believe that rental income streams generated by prime properties should be more protected in a worst-case scenario, which would allow the owner/investor to continue to collect net rents. Indeed, in the event of a property downturn, vacancy rates could spike much more rapidly in secondary/lower-tiered property markets.
Alternatively, a cooling real-estate market can offer new opportunities to property investors because new buildings may be purchased at a more advantageous (discounted) price. Hence, we believe that it is important to invest in a ‘value-added’ real-estate fund, managed by a competent asset manager. We advise against going on a rushed shopping spree, to avoid investing at the top of the cycle. In other words, the investment period of such private fund should span at least a few years to avoid putting all one’s eggs in one basket, by acquiring everything in an ‘unfavourable’ (expensive) phase of a property cycle;
This is why we put forward an investment strategy with two alternatives:
- The direct purchase of real estate in top-tiered property markets. This is certainly the case for prime real estate in Europe (including the United Kingdom at a later stage). However, the condition is that the investor's asset-base is large enough to allow him or her to buy assets directly, or
- The purchase of units in a ‘real-estate private equity fund’, with a manager who creates value on his/her own (cheaper acquisitions, identification of ‘off-market’ transactions, extension of existing buildings, office to flat conversions, upgrading of buildings to collect higher net rents, etc.).
Of course, investors can choose a combination of these two options.
As mentioned, we are positive on the value-added real-estate segment irrespective of geography. We keep a negative stance on UK REITs due to deteriorating conditions in the country's office markets (particularly London) and we are negative too on a number of emerging markets.