Property funds have become hugely popular with private investors, especially those in search of an income. Overall, I’m a big fan of real estate investment trusts or REITs as they are known – these permanent capital vehicles provide a great way of matching illiquid underlying assets with investor demand for an income. But investors do need to keep a wary eye on the property cycle, which tends to move towards its own rhythm. Most real estate investors I talk think we are late cycle especially in prime places such as London offices but there’s also huge regional variation, both within the UK and internationally. Berlin and Germany, for instance, seem to be at a very different stage in the cycle – after many years of suboptimal growth.
A good overall primer for global real estate markets can be found in the third edition of UBS’ Real Estate and Private Markets’ Real Estate Summary 2018 which was published late in August. Its top line is as follows: “Despite the current fundamental backdrop for real estate investment remaining supportive, risk is on the rise. As foreseen, the risk premium for real estate is narrowing as long-term interest rates rise. Furthermore, the weakening of economic data in Europe, coupled with deteriorating trade relations with the US, make the demand side of the equation weaker than six months ago”.
The chart below also very nicely sums up the state of play in key regions – and key property types. You’ll see that the UK comes out as rather less attractive whilst Germany comes across as much more compelling.
The UBS report does highlight one key sector which it thinks has much further to go: logistics developments. I’ve been slightly sceptical of this big box sector here in the UK but UBS provides a useful corrective, especially for European investors. Me thinks it’s time for someone to launch an East European Black Box Logistics fund:
“The logistics sector has continued to benefit from retail’s woes, with take-up in Europe remaining strong in 2Q18. There continues to be a low amount of space coming to market speculatively with a significant amount of occupiers favouring a design and build approach. A key driver of the sector besides e-commerce has been an upswing in global trade over the last 20 years; however, there are now significant downside risks in the form of tariffs and the more unpalatable prospect of an all-out trade war. Nonetheless, rents continued to rise in 2Q18 at an annualized rate of 1.3%. While this may not seem stellar, it should be remembered that the logistics sector has historically seen very low levels of rental growth due to the bespoke nature of many units and the elasticity of supply. There is also a notable divergence between regional and urban logistics, with the 55 cities monitored by CBRE seeing an average 4.3% increase in rental values, 300 bps higher than the pan-European average. This reflects the importance of being close to large consumer centres for distribution companies, as well as other light industrial operators. The biggest increase were observed in the more peripheral market, with rents in Budapest increasing 11%, although the Netherlands also saw strong increases with the Venlo-Venray industrial area growing 6% and Tilburg/Waalwijk increasing by 9.4%.”
Asian Dividends on the increase
One of the most interesting stories of recent years has been the growth of the humble dividend in Asia. Traditionally value and income investors have tended to steer clear of Asia, largely because the yield was low and corporate governance lamentable. Too often cash inflows were seen as a sign to overpay executives and splurge on wasteful capex. The story has changed though in recent years. Value investors are swarming over Japan and dividends are on the increase in Asia.
The latest evidence for this income trend comes from Janus Henderson who keeps a track of global dividend payouts more generally. Their latest report observes that dividends from companies across the Asia Pacific region, excluding Japan, “soared 15.9% to a record £222.6bn in the twelve months to the end of July 2018…this was more than twice the estimated 5.5% growth in dividends seen across the rest of the world… Between 2009 and the end of July 2018, companies paid their shareholders £1.3 trillion, and on annual basis, dividends have more than tripled in value (+210%). Meanwhile, dividends from the rest of the world have doubled (+103%)….Over the same period, UK dividends have grown by 76.5%, impressive for a mature economy, but behind the faster-developing regions of the world.”
Over the next twelve months, Janus Henderson expects dividends in the region to rise 10.9% on an underlying basis to break a new record of around £239bn, equivalent to a headline growth rate of 7.5%.