Real Estate Investment Strategies
Pol R. Tansens – March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Major signals to real estate investors
a) Still negative real interest rates (inflation!),
especially in Asia
Real interest rates
5-Mar-12
3-month
-2.41
-1.66
10-year
-0.80
-0.22
CPI (y-on-y)
2.90
2.10
China
Hong Kong
Philippines
Singapore
-2.13
-5.70
-0.69
-4.40
0.32
-4.26
-0.95
-2.78
3.20
6.10
3.90
4.80
Brazil
Source: Bloomberg
2.81
6.39
6.22
United States
Euro zone (Germany)
Negative real interest rates
Making property investments popular to combat inflation
Pol Tansens - March 2012
Major signals to real estate investors
Real estate and inflation
1
perspectives
Values and rents tend to be correlated with demand-pull inflation ,
enhancing returns on equity
2
But cost-push inflation may have an adverse impact on real estate
financing
If you have access to debt today
“if” , rates are (still) reasonable
It is time to secure the cost of funding !
1Demand-pull
inflation: inflation stemming from stronger demand for products and services, normally
leading to higher revenues (rents)
2Cost-push inflation: inflation stemming from higher commodity prices (pushing up interest rates –
thus funding costs - without necessarily producing higher rents in exchange)
Pol Tansens - March 2012
Major signals sent to real estate investors
b) Different property drivers
Mature countries
Emerging countries
Concerns over growth prospects for
rents and capital values
Better growth prospects for rents and
capital values
In particular for the office markets
For commercial and affordable
residential real estate
Currency risk – which is rather new –
for EUR/USD/GBP denominated
investments
But prime products – whether
residential or commercial – are
heavily sought after
Not only in Asia, but also in Latin
America
But luxury home prices may cool off
due to tightening measures
Pol Tansens - March 2012
Major signals sent to real estate investors
 C) Stock market volatility
 Real estate securities were very volatile in 2011, which does
not necessarily reflect the health of the underlying property
markets
 Sentiment for real estate securities was particularly
negative in Asia
•Given current and projected inflation rates
•Given government measures to cool the markets
Pol Tansens - March 2012
Major signals sent to real estate investors
 Returns in the long run
(source: EPRA, total return = share price performance + dividends,
expressed in local currency)
Asset Classes (EUR) - 12 January 2012
Global Listed Real Estate
Global Equities (FTSE)
Global Bonds (JP Morgan)
European Real Estate
North American Real Estate
Asian Real Estate
Source: EPRA - All figures expressed in euros
Ytd return (%) 10-year annual return (%) 20-year annual return (%)
6.9
4.7
0.6
4.6
5.5
10.1
6.0
3.8
4.4
5.2
6.5
5.8
9.0
NA
6.0
6.9
12.6
6.9
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Real estate becomes increasingly polarised
 The real estate investment world is getting increasingly
‘polarised’
 Leading to substantial differences in (expected) performances
Between mature and emerging markets
Asia and Latin America
Europe and the US
vs
.
Between the various property sectors
Offices
vs
.
Retail
Within each sub-market
Examples: Paris,
London, New York
Pol Tansens - March 2012
Real estate increasingly polarised
Onofthe other hand, the world is
On the one hand, the world is getting rid
 Excessive leverage (coupled with
re-financing issues)
 Excessive oversupply
 Property asset classes which are
currently “underperforming’’
This process may take several years.
Examples:
•Residential assets along the
Spanish costas, Ireland, specific
areas in the US
•Secondary office buildings
across the world (subject to redevelopment)
progressively investing in the
‘right’ asset classes
 Which are considered as good
alternatives to other (often loweryielding) asset classes
Examples
•Energy-efficient buildings (the
‘green’ revolution) across the
world
•Secured-cash flow prime
commercial buildings across the
world
•Residential assets in specific
mature and emerging countries
alike (Benelux, France,
Switzerland, Brazil, Asian
countries, …)
Pol Tansens - March 2012
Real estate increasingly polarised
 The dichotomy between prime and secondary markets is
1
widening, with:
• Significant investor demand for prime product that is
often difficult to find
 Leading to lower gross initial yields (capitalisation rates)
• Secondary buildings gradually being phased out of specific
markets
 Leading to higher gross initial yields
• The search for energy-efficient buildings (Are tenants
willing to accept higher rents – How can the green
advantages be quantified properly?)
1
Prime markets refers to market composed of best-quality buildings, located in top locations.
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Where to invest today within the Real Estate
universe?
Profile
Age
Lower
risk
• Existing asset
Higher
risk
• Development
project
• Assets under
re-structuring
Investment
strategy
Environment
al criteria
• Core
• Core+
• Different
environmental
criteria
• Value-added
• Opportunistic
• High energy
consumption
• No label or
green
certificate
Occupati
on
Asset
type/location
• Rented
(remaining
lease
duration)
• High
vacancy
rate
• Prime
• Secondary
General rule:
We should be at the right side of the investment
universe!
Pol Tansens - March 2012
Where to invest today? Residential real
estate
Mature countries
Emerging countries
We have a choice between ‘good’ and
‘bad’ markets !
•Some ‘good’ markets are still
relatively well performing, and have
barely noticed any crisis
 We have a choice between ‘luxury’ and
‘affordable’ markets
• Specific areas in France, Belux,
Switzerland, Scandinavia, the US …
•However, we expect capital gains to
ease in the future
• Land values are important when
considering residential investments
 “Bad” markets are poorly performing
•Specific areas in Spain, Ireland,
Greece, the Baltics, the US …
 Investors seem to progressively
favour ‘affordable’ housing
•Whether in Asia (South East Asia,
India, …) or Latin America (Brazil)
•Indeed, the luxury segment has
become very expensive, and may be
subject to volatility
• Local authorities are attempting to
cool off specific property markets
• Or economic conditions may suddenly
deteriorate in the future
 It may take another 5 years or so
before the entire overhang will be
digested
•So prices are low, but may stay low
in the mid term
Pol Tansens - March 2012
Where to invest today ? Commercial real
estate (1/2)
Emerging and mature markets alike





Investments should be made in prime assets (unless investors are
willing to take substantially higher risks)
Offices – still the most important asset class – should be energyefficient
The future is rather grim for existing stock
Retail is in many countries – but not in all countries - considered
as less cyclical
Especially in Continental Europe (due to strict planning
regulations)
Although Logistics is cyclical, it carries a high cash yield today,
which may be attractive
Although return expectations should not be overestimated in the near
future, we think they will remain acceptable to investors
Pol Tansens - March 2012
Return perspectives for commercial real
estate (2/2)
Mature countries
We are expecting
Emerging countries
We are expecting
Capital value growth in line with, Higher growth in capital values
for prime properties, given the
or slightly above inflation
strong (international) investment
expectations (2% or so) – yield
demand
compression has finished
Stable headline rents, which are
‘mildly’ indexed
Effective rents may be lower as
landlords are aggressively
marketing to reduce vacancy rates
Consequently,
in
some markets return on equity
– after reasonable gearing
(50%) – should
be in the region of 7% for
2012
 Modestly rising headline rents
Consequently, return on
equity – after reasonable
gearing – should be in
the region of 10-15% for
2012
Pol Tansens - March 2012
Return perspectives for residential real
estate
Mature countries
Emerging countries
We are expecting
We are expecting
Slowing growth in prime housing
prices, although core markets are
expected to report positive
returns
Stabilising luxury housing prices
 Growth in middle-income housing
prices
Still difficult situation for
problematic areas
Consequently, return on equity
– after reasonable gearing
(50%) – should
be in the region of minus 10
to plus 5% for 2012
Consequently, return on
equity – after reasonable
gearing – should be in
the region of plus 0-15%
for 2012
Pol Tansens - March 2012
Summary
1. Major signals sent to real estate investors
a) Negative real interest rates, especially in Asia
b) Different property drivers
c) Stock market volatility
2. Global real estate becomes increasingly polarised
3. Where to invest today?
a) Residential markets
b) Commercial markets
4. Conclusions
Pol Tansens - March 2012
Conclusions
 The world is sending major signals to real estate investors. Real
interest rates are negative in many areas, and property drivers are
different across the globe
 As a result, global real estate is increasingly subject to
polarisation. Consequently, investors should be advised to be at the
right side of the investment universe
 For residential real estate in the mature markets, investments should
be made in these areas considered as being ‘good’ . Poorly performing
markets are rather cheap, but may remain inexpensive for a longer
while. In the emerging markets, investors are increasingly favouring
affordable housing development schemes
 For commercial real estate – whether located in the mature or the
emerging markets – investments should be predominantly ‘prime’
(unless investors are willing to take substantially higher risks)
Pol Tansens - March 2012
Thank you for listening !
Pol R. Tansens
Head of Real Estate Investment Stategy
pol.tansens@bnpparibasfortis.com
Pol Tansens - March 2012