Property markets globally have recovered from the valuation declines recorded at the height of the financial crisis, but in large part, this has been restricted to quality product, in quality locations. Whilst theory would imply that a good degree of the projected positive re-valuation has already taken place, prospects for the sector remain healthy with pockets of solid growth expected where portfolio managers have the ability to enhance cash-flows, re-position assets and add value. Market experience now as always, will be key.
Why Property, Why Now?
It has been well over a year since the major European economies emerged with the aid of unprecedented monetary and fiscal support from recession. Growth, however, remains patchy and uneven with lingering sovereign debt fears, geopolitical uncertainties and planned austerity measures all contributing to undermine market confidence and dampen financial market activity. In response, bond yields remain historically low in core Europe, cash deposit rates offer little reward and equity dividend payments remain uncertain. It is for this reason that investors hunting for yield have been attracted to commercial property given its high income generating characteristics (see chart 1). This may sound controversial given that commercial property is very much dependent upon tenant demand; with broad occupier market requirements weak given the likelihood of subdued economic output, falling real income growth, higher taxes, restricted credit and high unemployment. But for risk averse investors, good quality real estate, let on long leases to financially strong tenants still offers very attractive returns in an ever uncertain financial world.
The comparative performance of property vis-à-vis other major asset classes is one of its principal attractions. As table 1 shows, in the UK, property should make up a significant component of any multi-asset portfolio as it has delivered stronger returns over most time periods compared to equities and government bonds – with a third of the volatility attached to equities.