Franklin Templeton Real Asset Advisors: On property market trends for 2014
13 January 2014 |
Investments |
General | Jack Foster, Wilson Magee, Franklin Templeton Real Asset Advisors
Wilson Magee, Director of global real estate and infrastructure securities and portfolio manager.
As a result of generally recovering underlying property market trends, listed property companies around the world overall have continued to deliver growth in both revenues and per-share profits. We expect many global property markets and property sectors to potentially continue these fundamental growth trends in 2014 as recovering economies and limited construction deliveries of commercial properties are likely to support further rental growth, in our view. Despite concerns regarding increases in interest rates, many listed companies are likely to lower financing costs on existing debt in 2014 as lower-cost debt replaces maturing debt. Based on our fundamental analysis, we believe investors in property stocks could potentially continue to see dividend growth over the next few years because of profit growth potential and historically low pay-out ratios. Many factors affecting profit growth and share price performance vary by market, however.
Trends in underlying property markets have remained positive for most US real estate investment trusts (REITs), primarily because of muted levels of commercial property construction coupled with positive leasing demand for most property sectors. Improvements in leasing markets have pushed up occupancy rates, and in many markets lower vacancies and limited new supply should lead to rising rental rates for landlords, in our view. These improving underlying property market trends have led to earnings and dividend growth for many US REITs. US REITs also have been taking advantage of their access to capital markets, both debt and equity, in competing for acquisitions of assets and new development projects. We think these incremental investments can offer additional potential for value creation as well as for earnings and dividend growth.
Asian property markets have experienced significant rental growth trends in 2013, particularly among office rents in Japan and Singapore. However, these positive signs are offset somewhat by macroeconomic concerns such as decelerating Chinese growth and multiple government policy measures, especially in Hong Kong and Singapore, which have the potential to negatively affect sales trends. As a result, investors seem worried that residential prices may fall further.
Signs of improving economies within Continental Europe have been encouraging for property stocks there but may filter slowly into rental markets. Retail landlords have been posting modest results in terms of tenant sales, but rental revenues generally have been rising. Within the United Kingdom, a growing list of positive economic results has continued to support real estate fundamentals in the greater London area. Consistent with other improving economic data, retail sales have been growing, as have retail rents, particularly in London’s prime shopping districts.
The myriad industries and fundamentals in global listed infrastructure make broad generalizations for the asset class difficult. Highlights for 2013 include continued strong growth from North American energy infrastructure companies as well as from a variety of sectors in Asia and Latin America. Significant oil and natural gas discoveries in North America have been supporting significant investments in new pipelines, as well as in gathering, processing and fractionation facilities. Utilities in developed western economies, however, produced the weakest fundamental revenue and earnings growth, with European utilities generally posting declining profits. We expect lower earnings for many companies and are wary that additional dividend reductions may occur. We are much more positive in our expectations for European water and waste companies as industrial demand has been leading modest economic recoveries. Fundamentals are also positive for water and waste companies with Asian operations, in our view, particularly in China. Results for transportation companies were mixed, with potentially positive signals for 2014. Airports were in various stages of recovery amid growth in markets around the world, with Latin American and European airports leading in growth rates. We expect this growth could continue in 2014, with volume growth supplemented by revenue-enhancing capital-investment projects. Marine port operators in Asia produced uneven results, with Hong Kong disappointing while many of China’s ports continued to show strong through-put growth, and ports in Europe were signalling early-stage recoveries.
