Our Head of Global Property Securities, Stephen Hayes, shares his views on interest rates, valuations and opportunities in 2019.
Global economic growth continues toward long term trend levels, driven by developed countries, as household, private and Government sector fundamentals remain intact. However, heightened risks remain for the developing countries as the strong USD and rising US interest rates squeezes the money supply. The disparity in the fortunes of developed and developing countries is expected to widen further into 2019 as emerging market risks become further elevated.
Interest rates will rise, but fundamentals remain healthy
We feel that interest rates should rise in line with economic growth, leading to pressure on private property market values. However, direct property fundamentals remain healthy in most markets, with occupancy high and rents rising just about everywhere as commerce levels continue to rise. Tenant demand in major cities outstrips supply. Overall market rental growth is expected to grow in line with GDP growth. Although direct property valuations are high, we have not seen transactional evidence of price falls, other than some shopping centres where prices have fallen in the UK, Europe and the US.
There may be elevated volatility for the listed property sector as expectations on the timing of interest rate normalisation waxes and wanes. Fortunately property securities stocks trade at a discount to direct property. We continue to focus on urban infill assets in the world’s major cities where barriers to entry and commerce levels are high. We believe our global property securities portfolio is priced below private market and replacement values, giving us confidence that we can deliver ‘through-the-cycle’ property returns.
Where we see value – property in the US and more
Our largest exposure by region is to the US. The strength in that economy is driving tenant demand, particularly in the gateway cities. This applies for apartments, logistical warehousing and West Coast office buildings. In contrast, self-storage and seniors housing are seeing high levels of supply.
Our largest sector position is residential, with concentrations in apartments and single family housing in Los Angeles, the US Sun Belt Region, Finland and Berlin. We also see opportunity in student accommodation and apartments in the US, London, Sheffield and Bristol.
The listed property sector’s fundamentals are healthy, supported by solid economic growth, and that interest rates will normalise over time which may lead to pressure on direct property market valuations. However, due to the listed property stocks trading at a discount to private property valuations, we believe the sector can sustain its overall valuation.
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