Global real estate could pay hansomely
Real estate equities and funds have rebounded strongly from their lows in February this year, reflected in the 65% rise in the Plexus Global REIT Index in US dollar to the end of September.
“The recoveries range from exceptional to more mundane,” says Dr Prieur du Plessis, Plexus group chairman. “On the exceptional side, the S&P Australia REIT and Singapore REIT indices respectively earned returns of 101,1% and 89,5%. On the lower side the S&P Hong Kong REIT and Belgium REIT indices achieved 26,4% and 16,9% respectively. Although below average, South Africa’s recovery has been a stellar 41,9%.”
According to Du Plessis, the strong rise in global real estate equity prices should be seen in context. The prices of global real estate securities peaked in January 2007 then declined to a low in February 2009, resulting in a 68,2% loss in US dollars as measured by the Plexus Global GDP-weighted REIT Index. The subsequent rise has taken the index back to 1994 levels and it is still a massive 48% below the January 2007 peak.
“There has been a huge disparity in the returns of the various REIT indices since January 2007,” says Du Plessis. “The S&P Hong Kong REIT Index has been the best-performing index in US dollar on a price basis with -13,7%, followed by South Africa with -16,4%. Lagging country REIT indices include the UK with -69,6%, Australia with -55,8% and the US with -51,7%. On a total return basis the South African REIT Index returned 5,64% with dividends and income reinvested, followed by Hong Kong with 1,35%, while Australia and the UK emerged the worst with -48,32% and ‑66,45% respectively.”
Real estate equities were a unique preferred asset class during the five years preceding the major top of the global real estate market in 2007 due to significant outperformance of global equities and a low correlation with bonds and equities. However, since the onset of the third quarter of 2007 the picture has changed significantly as the correlation between global real estate equities and the global equity market has narrowed substantially.
“With the major sell-off in global equities in the fourth quarter of 2008 and the first quarter of 2009, REIT equities fell to large discounts to net asset value due to forced fund liquidations,” says Du Plessis. “Following the substantial recovery since the carnage, REIT equities are now trading closer to their underlying net asset values.”
Although REIT equities currently present good value, with the Plexus Global REIT Index at levels last seen in 2004, they face the same difficulties as the global equity market going forward. Retailers in the US are being forced into bankruptcy owing to reduced consumer spending and weak credit conditions. Furthermore, the implosion of the financial services industry in especially the US is creating increasing vacancy rates. A major stumbling block in the US is the debt maturities in 2010 and 2011 of commercial real estate firms that, together with continued tight credit conditions, hamper these firms’ potential to expand their property portfolios.
However, a sustained improvement in the global economy and increased consumer spending will improve the earnings outlook for real estate companies and therefore global real estate significantly.
“The major lesson learned by investors in real estate over the past three years is the importance of global diversification’” says Du Plessis. “The global real estate market offers opportunities that cannot be exploited in one local market, with the latter heavily influenced by factors such as demographic trends, land constraints, zoning regulations and future supply and demand.
“Economic cycles differ from country to country and between economic regions – so do real estate cycles,” he says. “Real estate in some countries may withstand economic shocks better than others. Excellent opportunities may exist in the US, for example, while real estate in Hong Kong may be expensive.”
“Diversifying some of their domestic real estate investments into global real estate could pay handsomely for South African investors, especially since South African real estate companies and funds were relatively immune during the global sell-off over the past two years,” says Du Plessis.
South African investors who have already taken their maximum foreign investment allowance offshore can invest in global real estate through foreign rand-denominated funds such as Catalyst Global Real Estate Feeder Fund, Fortress REIT Fund, Grindrod Global Property Income Fund, Marriott Global Real Estate Fund and Oasis Crescent International Property Equity Feeder Fund.
Investors with offshore funds can invest in real estate in developed markets through First Trust FTSE EPRA/NAREIT Developed Markets Real Estate and in global real estate through SPDR Dow Jones Global Real Estate ETF.
