Global Property Remains Promising

The outlook for global property remains sound on the back of economic growth says Mark Appleton, chief investment officer at Barnard Jacobs Mellet Private Client Services, who recently returned from an overseas visit to global property investment managers.

Appleton says the various geographical areas still offer opportunity although perhaps not at the same levels as seen previously. "There has been significant yield compression across the globe and this has been the major source of performance to date. However, the view is that no further compression is anticipated and the focus will be on rental and distribution growth going forward." Appleton says that this will largely be driven by increasing replacement cost which will impact on the level of supply.

Appleton says general consensus is underweight in the US, Australia and Hong Kong while overweight in Japan, Singapore, Germany, France, and the UK.

Appleton says there are concerns around US property due to a slow down in economic growth. "While interest rates will trend down it is primarily economic growth that will drive listed property returns and this is questionable in the US right now," he says. He adds that while consumer spending is not as vibrant as the past five years, it is still reasonably strong as unemployment remains at the 4% level.

Appleton says there are however pockets of growth and value in the US such as hospitality and apartments. "Apartments and hospitality are the growth areas. Hospitality is becoming a target for private equity."

Appleton says that Asia offers strong growth prospects and although yields are no longer a bargain, growing demand should serve to underpin strong rental growth. "In Singapore for example the Government is looking to double tourism."

Appleton says the view is that China is offering value, especially coming from such a low base. It will benefit from increased internationalism as its market opens up and the Olympics focuses international attention.

Appleton says India is also viewed favourably as the other growth engine after China although it has its challenges. India is about five to six years behind China's growth path so there is still plenty of upside. It is also favoured as a business destination due to the strong English influences and hence attractive for business.

"Between Delhi and Mumbai the vacancy is practically zero, with waiting lists for leases. The current yield is around 7% and this is likely to reduce by about 100 basis points as the cost of property increases." Appleton says that while many of the buildings are of high quality, the conditions are such that even young buildings can look "worn" quickly. "Infrastructure is poor and varies between regions. Many offices require reserve power generators. The roadways are often in disrepair and some developers add their own roads to new constructions rather than wait for the local government." Appleton says shopping malls are being developed with varying success. "India, and perhaps Asia more broadly, represent good investment opportunities as many members of society have broken into the middle class and are now cash rich. The Indian work force in particular is easily employable, speaks English well and is highly motivated," he says.

Japan is also viewed favourably by investors. Appleton says due to low inflation and low interest rates there is a huge appetite for yield among domestic investors. The level of office take up is high and there are supply constraints resulting in little new office development in the last five years. Japan also faces natural geographical constraints and is prone to natural disasters. "Thus far demand has been relatively low, so there is no incentive to supply. This is likely to change. The typical yield on the property companies is in excess of 3% and represents reasonable pick up over the government bond at 1,7%."

Appleton says property pundits are bullish on Germany which is still in the early part of the business cycle. Appleton says that strong growth for property is continuing in the former East Germany and Berlin in particular is offering investment opportunities.

In general, higher returns are expected from Europe on the back of better rental growth than from UK. Retail is favoured followed by industrial and then offices.

In the UK Appleton says the view is that the investment markets are benefiting from a shift in focus of financial firms towards the UK and therefore office space is stretched as a result. "London is the hub of this demand, but the influence does spread out into the regions, especially through retail." Appleton says the demand from corporations is strong to the extent that it is somewhat immune from interest rates and growth rates in rent are currently in the region of 3% and could stretch to double digits in the near future. "However, yields are below bond rates and growth will have to be strong to justify valuations".

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