Global listed real estate hasn’t had the easiest start to 2016. Difficult macroeconomic conditions and uncertainty about the strength of a number of global economies has buffeted prices constantly and put investors on the edge of their seats.
The initial culprit was the Chinese economy. As investors struggled to assess the real extent of the apparent slowdown, markets reacted badly to the prospect of ongoing weakness, and global real estate securities were not immune to the ensuing sharp correction in equities pricing.
Confidence was eventually restored – just in time for the next shock – as the Bank of Japan introduced negative interest rates in an effort to boost domestic growth. The situation was exacerbated by the Japanese government embarking on a J-REIT buying spree in a search for yield, pushing valuations up to very expensive levels.
In the second quarter the US economy slowed, leading to concerns about global growth generally. The UK entertained markets around the world with debate about whether or not to stay in the European Union – ultimately exiting in the shock Brexit decision.
UK stock prices fell initially as a higher risk premium was factored in. The Bank of England cut rates, UK government and corporate bond yields are down, the Sterling has weakened and inflation expectations are up. On the flip side, business and consumer confidence indicators point to an economic slowdown for the UK in 2017. This means that the past five or so years of solid growth are unlikely to continue, and the outlook for the UK listed real estate sector, in particular those with a London focus, now appears less certain for at least the next 12-24 months.
Meanwhile, Continental Europe is starting to feel the benefit of four rounds of quantitative easing, and companies are taking on more staff and leasing additional space in major cities. As a result vacancy rates are tightening, and improved consumer confidence is driving increased sales in the better quality shopping malls.
Next up? The US Federal election in November. Trump v Clinton. Neither candidate excites. You get the impression that a win for Clinton is likely to mean business as usual, whereas a win for Trump could only be described as a giant leap into the unknown…
Is it any wonder then, given all the global uncertainty, that the Aussie REIT sector has been one of the best global performers so far this year?
Our listed market has been underpinned by a solid direct property market, which has benefited from strong interest from offshore investors. Good quality, well-leased, centrally located office buildings can be acquired now on an initial yield of between 5-5.5 per cent, which represents a very attractive entry point in global terms. Forward dividends for A-REITs are around 4.5 per cent, which compares favourably with the global average of 3.7 per cent and is a very healthy 260 basis point spread over current Aussie 10-year bond rates.
Balance sheets for A-REITs are strong. Average gearing is sub 30 per cent, companies are reporting modest but sustainable growth, and the Reserve Bank is set on an easing path, all factors likely to help anchor cap rates and underpin valuations for the next little while. And some modest profit-taking in the sector during August has left Aussie listed real estate looking good value once more.
The bottom line? Aussie REITs may well be a relatively safe haven in an uncertain world.