Wednesday, November 1

Latest View on Properties

The manager of a highly respectable property fund came visit us a few days ago. Though you will be interested in knowing his latest views:

Key Takeaways

  • Contrary to my previous belief, the global property market is mostly commercial (retail + office + industrial: 71%), with residential representing only 15%.
  • Within commercial properties, office rental is volatile because it is highly correlated with the local economy. On a global scale, however, volatility is lower because each region has a slightly different economic cycle.
  • Retail (shopping mall) rental is much more stable (1-6% return, plus asset appreciation) because shopping malls have a lot more monopolistic power.
  • In regions where REIT market is mature (e.g. USA), the investors are “sticky”, i.e. they are long-term investors looking for stable returns. On the other hand, emerging REIT market e.g. Asia (Europe?) is more short-term focused and they treat REIT more like property stocks.
  • Overall, pension funds globally are planning to increase their real estate allocation from the current 5% to 10%.

What does it mean?

  • Don’t worry too much about the recent dismal US home-building data. Although it may indicate lowering consumption power of the Americans, it does not really affect the investment return of the commercial properties.
  • For those who like to buy stocks based on the economic recovery story, buy those with lots of office buildings (e.g. Hong Kong Land and Sun Hung Kai Properties in HK), and not the shopping mall operators (e.g. Westfield in AUS, Simon Property Group in UK).
  • Currently, the Asian property sector offers explosive but unstable investment return. However, as REITs become more popular, the sector may behave more like its US counterparts -- less volatile, and arguably more attractive as a long-term investment.
  • Last but not least: when pension funds (with multi-billions of capital) are looking to increase their positions in real estate… we’d better hurry and ride on the boat!

Related post: Introduction of REIT

* “Others” in the chart include hospitals, hotels and storage buildings. Data source: EPRA/NAREIT, as of Aug 2006

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