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Strong rental growth has been recorded in some of the highly cyclical, supply-constrained office markets such as Hong Kong.

Strong rental growth has been recorded in some of the highly cyclical, supply-constrained office markets such as Hong Kong.

Global real estate benefits from stock market retreat

Continuing volatility on the world’s stock exchanges means that investors are again turning to global real estate – especially in Asia, believes a top analyst.

David Paine, head of real estate at Standard Life Investments, says that the hasty retreat from stocks and shares has created opportunities in property.

“An attractive component of a diversified, multi-asset portfolio is global real estate,” he said. “Good quality commercial property is likely to remain resilient despite the global economic slowdown, which we expect to result in a period of weak growth rather than outright recession.”

Asian markets - where the underlying economies are buoyant - remain especially resilient and this should translate into healthy future demand from tenants, believes Mr Paine.

And he added that despite concerns about a slowdown in economic activity in Singapore and an increasingly tight labour market in Hong Kong, the region's robust underlying growth are expected to continue to underpin real estate markets.

“Real estate benefits from a relatively secure and sustainable yield compared to other assets. In addition, the weight of money looking to invest in commercial real estate remains reasonably strong and we do not foresee this changing for higher quality ‘safe haven' exposure,” he said.

Across the world, a modest recovery is materialising in most real estate markets, leading to improving tenant demand as occupier confidence and business investment increases.

Vacancy rates have generally been falling globally and strong rental growth has been recorded in some of the highly cyclical, supply-constrained office markets such as Hong Kong, London and Paris.

However, there are signs that performance is becoming more polarised between the Asian markets and the weaker Western markets, where recovery remains muted,” he said.

“The story is more complicated in the West where recent fears of a ‘double dip' have weighed on investor sentiment. In North America, while most indicators are not pointing towards the US moving into recession they do foreshadow slower growth. Occupancy gains are expected to slow in most markets as firms take a more cautious tone about future expenditure. In addition, investor assessment of future growth is likely to become more conservative and shift towards stronger tenants.

“That said, relatively low borrowing costs are set to continue to aid the US residential markets with mortgage rates falling to the lowest level (4.15%) in more than 50 years. This in turn should benefit the depressed retail market. There are also signs of a pick-up in rental segments with construction of multi-family units bolstering housing starts in July.”

In the UK historically low rates have encouraged investment and two years of capital growth for the IPD Index reflects positive attitudes towards commercial property.

However Mr Paine said that with only a small improvement in capital values in July the performance of prime assets versus the more challenged secondary markets had become increasingly polarised.

“Overall, though, real estate continues to hold its own against other assets. UK commercial real estate income yields are currently 6.3%,” he said.

In Europe, he believes that the trend of investor focus towards prime real estate will continue as lower yielding ‘safe haven' assets continue to appeal. Liquidity is expected to remain restricted for the foreseeable future as tighter regulation and bank deleveraging continue.

“However, European real estate still looks attractive on an income yield basis, relative to government bonds and cash. Overall, with interest rates generally anticipated to be lower for longer, yields on global real estate remain attractive in comparison to other asset classes.

“The key drivers for real estate are favourable, unless a major recession appears, so investors can reasonably expect positive total returns over the coming two to three years.

“However, investors need to be discerning; within each global region there is a degree of polarisation and the fundamentals of demand and supply vary markedly within the sub-markets that make up each area.”

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