Outlook for listed property fundamentals
Global economic growth continues to grow at a moderating pace. Growth in China is slowing due to a number of internal factors such as high local government debt, moderating terms of trade and a sluggish domestic economy. Countries reliant on China for export income will continue to be impacted by this outlook.
However, developed countries are enjoying some favourable trends. Unemployment is low, coinciding with good wages growth especially in the US, UK and Germany. Household fundamentals remain solid with consumption elevated in many developed countries. The result of the UK election will lead to some clarity on Brexit after a lengthy period of uncertainty on the political front.
Central banks’ extraordinarily accommodative monetary policies are expected to remain in place for an extended period. With modest inflation, central banks are typically citing external risks as the basis for the atypical policy settings.
Direct property market fundamentals remain healthy with high occupancy rates, typically with few supply concerns especially in global cities where barriers to entry are high. Market rental growth is continuing at moderate levels, driving cash flow growth. Expense pressures continue from wage inflation and land taxes, however operating margins are being maintained.
We expect listed property sector valuations to remain at current levels based on this macro-economic and property backdrop. Publicly traded landlords continue to take advantage of robust capital markets through equity issuance and selling non-core assets to further improve the quality of their portfolios.
We see value in residential, logistics and office markets
Our strategy’s largest exposures by property type are residential, logistics and office.
The concentrations to residential include apartments and single-family housing in US coastal gateway cities and the US Sun Belt, assets in London, Finland and Germany plus student accommodation property in the US and the UK.
Tenant demand continues to remain elevated for logistics assets. Retailers and wholesalers are investing in their supply chains in order to increase efficiencies and to counter the deflationary impacts of an increasingly transparent market place. We recently took some profits in our exposures to logistics in the US and Japan.
We have also lifted our office exposure on a global basis to be consistent with the slightly better outlook for growth around the world.
Our global listed property strategy is focused on high-quality urban infill assets in high barrier to entry markets in the world’s most bustling cities. The strategy’s cashflows are very secure, underpinned by contracted rental income streams. In addition, positive rental reversions are driving embedded cashflow growth.
Stephen Hayes is head of global property securities for First Sentier Investors. In his role, Mr Hayes is responsible for management of the global Ppoperty securities team, one of a number of First Sentier Investors’ investment teams. The team manages domestic, Asian and global property securities portfolios for a number of funds.
