Real Estate Investment Strategies Pol R. Tansens – March 2012
Pol Tansens - March 2012 Summary Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised 3.Where to invest today? a)Residential markets b)Commercial markets Conclusions
Pol Tansens - March 2012 Major signals to real estate investors Still negative real interest rates (inflation!), especially in Asia Making property investments popular to combat inflation Negative real interest rates
Pol Tansens - March 2012 Major signals to real estate investors 1 Demand-pull inflation: inflation stemming from stronger demand for products and services, normally leading to higher revenues (rents) 2 Cost-push inflation: inflation stemming from higher commodity prices (pushing up interest rates – thus funding costs - without necessarily producing higher rents in exchange) Real estate and inflation perspectives Values and rents tend to be correlated with demand-pull inflation 1, enhancing returns on equity But cost-push inflation 2 may have an adverse impact on real estate financing If you have access to debt today “if”, rates are (still) reasonable It is time to secure the cost of funding !
Pol Tansens - March 2012 Major signals sent to real estate investors Different property drivers Mature countries Concerns over growth prospects for rents and capital values In particular for the office markets Currency risk – which is rather new – for EUR/USD/GBP denominated investments But prime products – whether residential or commercial – are heavily sought after Emerging countries Better growth prospects for rents and capital values For commercial and affordable residential real estate Not only in Asia, but also in Latin America But luxury home prices may cool off due to tightening measures
Pol Tansens - March 2012 Major signals sent to real estate investors C) Stock market volatility Real estate securities were very volatile in 2011, which does not necessarily reflect the health of the underlying property markets Sentiment for real estate securities was particularly negative in Asia Given current and projected inflation rates Given government measures to cool the markets
Pol Tansens - March 2012 Major signals sent to real estate investors Returns in the long run (source: EPRA, total return = share price performance + dividends, expressed in local currency)
Pol Tansens - March 2012 Summary Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised 3.Where to invest today? a)Residential markets b)Commercial markets Conclusions
Pol Tansens - March 2012 Real estate becomes increasingly polarised The real estate investment world is getting increasingly ‘polarised’ Leading to substantial differences in (expected) performances Asia and Latin America Offices Examples: Paris, London, New York Europe and the US Retail Between mature and emerging markets Between the various property sectors Within each sub-market vs.
Pol Tansens - March 2012 Real estate increasingly polarised Excessive leverage (coupled with re-financing issues) Excessive oversupply Property asset classes which are currently “underperforming’’ This process may take several years. Examples: Residential assets along the Spanish costas, Ireland, specific areas in the US Secondary office buildings across the world (subject to re- development) On the one hand, the world is getting rid of Which are considered as good alternatives to other (often lower- yielding) asset classes Examples Energy-efficient buildings (the ‘green’ revolution) across the world Secured-cash flow prime commercial buildings across the world Residential assets in specific mature and emerging countries alike (Benelux, France, Switzerland, Brazil, Asian countries, …) On the other hand, the world is progressively investing in the ‘right’ asset classes
Pol Tansens - March 2012 Real estate increasingly polarised The dichotomy between prime 1 and secondary markets is widening, with: Significant investor demand for prime product that is often difficult to find Leading to lower gross initial yields (capitalisation rates) Secondary buildings gradually being phased out of specific markets Leading to higher gross initial yields The search for energy-efficient buildings (Are tenants willing to accept higher rents – How can the green advantages be quantified properly?) 1 Prime markets refers to market composed of best-quality buildings, located in top locations.
Pol Tansens - March 2012 Summary Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised 3.Where to invest today? a)Residential markets b)Commercial markets Conclusions
Pol Tansens - March 2012 Where to invest today within the Real Estate universe? ProfileAge Investment strategy Environment al criteria Occupati on Asset type/location Lower risk Existing asset Core Core+ Different environmental criteria Rented (remaining lease duration) Prime Higher risk Development project Assets under re-structuring Value-added Opportunistic High energy consumption No label or green certificate High vacancy rate Secondary General rule: We should be at the right side of the investment universe!
Pol Tansens - March 2012 Where to invest today? Residential real estate Mature countries We have a choice between ‘good’ and ‘bad’ markets ! Some ‘good’ markets are still relatively well performing, and have barely noticed any crisis Specific areas in France, Belux, Switzerland, Scandinavia, the US … However, we expect capital gains to ease in the future Land values are important when considering residential investments “Bad” markets are poorly performing Specific areas in Spain, Ireland, Greece, the Baltics, the US … It may take another 5 years or so before the entire overhang will be digested So prices are low, but may stay low in the mid term Emerging countries We have a choice between ‘luxury’ and ‘affordable’ markets Investors seem to progressively favour ‘affordable’ housing Whether in Asia (South East Asia, India, …) or Latin America (Brazil) Indeed, the luxury segment has become very expensive, and may be subject to volatility Local authorities are attempting to cool off specific property markets Or economic conditions may suddenly deteriorate in the future
Pol Tansens - March 2012 Where to invest today ? Commercial real estate (1/2) Emerging and mature markets alike Investments should be made in prime assets (unless investors are willing to take substantially higher risks) Offices – still the most important asset class – should be energy- efficient The future is rather grim for existing stock Retail is in many countries – but not in all countries - considered as less cyclical Especially in Continental Europe (due to strict planning regulations) Although Logistics is cyclical, it carries a high cash yield today, which may be attractive Although return expectations should not be overestimated in the near future, we think they will remain acceptable to investors
Pol Tansens - March 2012 Return perspectives for commercial real estate (2/2) Mature countries We are expecting Capital value growth in line with, or slightly above inflation expectations (2% or so) – yield compression has finished Stable headline rents, which are ‘mildly’ indexed Effective rents may be lower as landlords are aggressively marketing to reduce vacancy rates in some markets Emerging countries We are expecting Higher growth in capital values for prime properties, given the strong (international) investment demand Modestly rising headline rents Consequently, return on equity – after reasonable gearing (50%) – should be in the region of 7% for 2012 Consequently, return on equity – after reasonable gearing – should be in the region of 10-15% for 2012
Pol Tansens - March 2012 Return perspectives for residential real estate Mature countries We are expecting Slowing growth in prime housing prices, although core markets are expected to report positive returns Still difficult situation for problematic areas Emerging countries We are expecting Stabilising luxury housing prices Growth in middle-income housing prices Consequently, return on equity – after reasonable gearing (50%) – should be in the region of minus 10 to plus 5% for 2012 Consequently, return on equity – after reasonable gearing – should be in the region of plus 0-15% for 2012
Pol Tansens - March 2012 Summary Major signals sent to real estate investors Negative real interest rates, especially in Asia Different property drivers Stock market volatility Global real estate becomes increasingly polarised 3.Where to invest today? a)Residential markets b)Commercial markets Conclusions
Pol Tansens - March 2012 Conclusions The world is sending major signals to real estate investors. Real interest rates are negative in many areas, and property drivers are different across the globe As a result, global real estate is increasingly subject to polarisation. Consequently, investors should be advised to be at the right side of the investment universe For residential real estate in the mature markets, investments should be made in these areas considered as being ‘good’. Poorly performing markets are rather cheap, but may remain inexpensive for a longer while. In the emerging markets, investors are increasingly favouring affordable housing development schemes For commercial real estate – whether located in the mature or the emerging markets – investments should be predominantly ‘prime’ (unless investors are willing to take substantially higher risks)
Pol Tansens - March 2012 Thank you for listening ! Pol R. Tansens Head of Real Estate Investment Stategy