Treated by many as a pariah after the U.S. subprime collapse triggered the 2007 global financial crisis, real estate is increasingly back in favour with insurance, pension and sovereign wealth funds.
The evaporation of interest rates on high-quality government bonds is encouraging asset managers to look again at prime real estate properties and stocks, where they find returns far outshooting so-called “safe” sovereigns.
Sovereign wealth funds are a $4-trillion business and pension funds cover more than $30-trillion, so even a small shift could move billions away from lower-yielding and more volatile assets.
Top of the crop commercial and residential properties from London to Bangkok are in demand and there are signs of a bottoming out in the U.S. housing market, prompting major investors to buy foreclosed homes to rent.
A sign of increasing interest in the sector can be seen in real estate funds, which have attracted more fresh money than other sectors this year, according to fund-tracker EPFR Global.
Andrew Economos, head of sovereign and institutional strategy for JP Morgan Asset Management in Asia says sovereign wealth funds are particularly active.
“Sovereign wealth funds are looking for positive yields and they are finding anywhere between 5 and 7 per cent in real estate. They are getting yield on purchase as well as capital appreciation,” he said.
“They are diversifying across real estate into commercial, trophy properties as well as REITs,” he said. Real estate investment trusts (REITs) are securities sold like a stock and which invest in real estate properties or mortgages.
In one of the most recent high-end deals, Norway’s sovereign wealth fund teamed up this month with Italian insurance giant Assicurazioni Generali to manage prime office and retail properties worth €550-million in central Paris.
Norway’s sovereign wealth fund NBIM, which holds assets worth about 3.6 trillion Norwegian crowns ($598.93-billion), plans to raise real estate assets to as much as 5 per cent of its overall portfolio from 0.3 per cent at the end of March. China’s $482-billion sovereign wealth fund Investment Corp. said on Wednesday this was one of the sectors it was now focusing on.
One way that investors are tapping the real estate market is through stocks and real estate investment trusts, which offer substantially higher dividend yields than sovereigns in areas spanning from Europe and the United States to Japan.
Dividend yields for stocks listed on the MSCI real estate index for the euro zone reach nearly 7 per cent, according to Thomson Reuters DataStream, which beats by far negative or near zero yields for government bonds in core countries Germany or France. This is also higher than other sought-after assets including corporate bonds, which offer an overall yield of 3.24 per cent on the iBoxx index.
The MSCI real estate euro zone index is up 13.1 per cent since the beginning of the year compared with 2.0 per cent for the overall MSCI index for the region, DataStream shows.
Yields on prime commercial or real estate housing – the actual property rather than stocks – vary widely but analysts give estimates of an average 3-5 per cent for the best property in Europe.
“Certainly the work that we have done on an advisory basis to clients in the past three to four months has highlighted the importance of property in their portfolios,” said Ken Adams, global strategist at Scottish Widows Investment Partnership.
That market is highly polarised, however, with anything less than outstanding – properties offering long leases with financially sound tenants in sought-after areas – being spurned by investors put off by recession and the euro debt crisis and prices for these more secondary assets falling.
Commercial real estate, which had widely collapsed in the wake of the subprime crisis, is competing with other high yield assets such as emerging market bonds and must offer the safety of a high-quality bond with better yields to attract investors such as pension funds, said John Danes, property research director at U.K. fund manager Aberdeen Asset Management.
“The return has to be very financially secure, with long leases and if there is some kind of inflation link as well, all the better,” said Danes, adding that he’s seen increased interest across sectors, from long-let retail and offices to British supermarkets, which he said offer financially solid tenants and yields of 4.5-5 per cent.
Sluggish U.S. housing recovery
In the birthplace of the subprime crisis, in the United States, a number of investors are focusing on the opportunities that have been created in housing.
Blackstone Group LP has spent more than $300-million to purchase over 2,000 foreclosed homes to rent and bet on a recovery of the U.S. housing market, the firm said in mid-July.
Although analysts forecast any growth in the U.S. housing market will be sluggish and it could take 10 years or more to go back to 2006 peak levels, commercial housing has seen nine consecutive quarters of uninterrupted improvement with vacancies down and rents up, said Citi analyst Jeff Berenbaum.
“Yields are in the high 3 per cent to low 4 per cent range for the strongest properties,” he said. “For a risky market like commercial housing that’s pretty historically low but if you compare with treasury yields, it’s still a pretty wide spread.”
On the housing front globally, prime property in major cities has seen its strongest growth since 2010 in the second quarter, with a 1.3 per cent growth in the year to June, according to Knight Frank’s prime global cities index, which tracks the top five per cent of mainstream markets.