US Real Estate Investment Trusts (REITs) have outperformed those of other regions due to the improving economy in the country.
Rising growth, falling unemployment rate, increased non-farm payrolls and more mergers and acquisitions deals in the sector have all supported the performance of the REITs.
Developers in the United Kingdom, meanwhile, have also reported positive earnings overall, though their investment returns have been relatively lower.
Benefiting from rental growth, developers with large exposure in central London regions will show good performance.
But in continental Europe, the sector’s prospects have not been good due to a generally weak macro outlook and deflation environment. Although authorities are expected to unveil more monetary easing, share prices of real estate firms there haven’t shown any gains.
In Asia, stock markets have been dragged down by concerns over the broader economy. Japan has entered technical recession, Hong Kong has seen a slowdown in retail sales growth and Singapore is suffering from weakening industrial production.
Real estate stocks have fallen in line with the overall equity markets in the region.
Going forward, we believe global market sentiment overall will continue to be driven by the expected trend in US interest rates. We think the Fed will continue to raise rates following the liftoff last December.
Due to the strong US economy, we are confident that boosting exposure to the property market in that country will pay off. US REITs are now trading at a 10 percent discount to their average net asset value while the earnings are forecast to increase 8 percent.
We are upbeat about the prospects for US residential property, Grade-A office space and commercial buildings in coastal cities there. Such properties have strong earnings growth potential and will benefit notably from the economic recovery.
In the UK, we believe interest rates will remain low for a longer time. The inflation rate will hardly reach the 2 percent goal set by its central bank. So authorities are not likely to raise the interest rate before the end of 2016. UK REITs have healthy fundamentals and are at reasonable valuations.
Along with the US, investors may consider increase their allocation to the UK property market.
In Asia, Grade-A office buildings and residential units in Tokyo will be relatively attractive. However, in continental Europe, we would suggest an underweight stance on such assets.
Overall, we believe the pace of Fed rate moves will dictate the trend of the global property market.
This article appeared in the Hong Kong Economic Journal on Jan. 27.
Translation by Myssie You
[Chinese version 中文版]
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