Global fund managers offer thoughts on investing in REITs near and far.
9/28/2016 | By Charles Keenan
REIT magazine: September/October 2016
When it comes to international investing these days, suffice it to say there’s never a dull moment. World growth has been tepid in part due to limited private investment and aggregate demand, but in general supply for real estate remains constrained. That has meant select opportunities for leading REIT fund managers.
Their choices blend both macroeconomic trends, such as gross domestic product (GDP), and microeconomic factors, where good companies sometimes trade below their net asset value (NAV). From their outlooks to Brexit to negative interest rates, REIT magazine recently spoke with five fund managers to explore their latest thinking on recent developments in global real estate investing:
REIT: What’s your global outlook for the next 12 months?
STEVE SHIGEKAWA: We have a favorable outlook for global real estate. With historically low interest rates across the globe, I think the stable income generated by property companies will continue to be appealing to investors. Today we are looking for modest growth that can drive demand for real estate, and it’s showing up in increasing occupancy and rental rates.
JOEL BEAM: In a word, it’s all about volatility. We are investing in a theme of recovery in the economy, particularly in the first-world economies, where we’re investing in the idea of modest growth. We are trying to take a threeto- five-year view of a return to normalcy.
JON CHEIGH: We expect to see some improvement in the global economy. That is important because that is the demand side of real estate. The search for yield has been a positive for most REITs globally. Interest rates will rise as economic growth expectations rise as well over the next six to 12 months, but rates won’t rise sharply.
JAY LEUPP: Our outlook includes modest GDP growth in most nations, low interest rates, and for the most part limited new supply, creating an environment for global real estate securities of modest, consistent, total returns.
MARC HALLE: We’re looking at subdued global growth around the world. You saw a few GDP downward revisions post-Brexit. Global growth has slowed. In the U.S., our economy is expected to slow due to a stronger dollar. Interest rates are low and will likely be low for longer. However, real estate and REITs are in a good spot relative to alternatives.
We want to be more defensive in the kinds of companies we own, in niches such as storage, student housing, or health care.
– Jon Cheigh, Cohen & Steers Global Realty Shares (CSFAX)
REIT: How will Brexit affect your investment strategy going forward?
BEAM: Frankly I think it just put one of the world's great property markets on sale. This is obviously a short-term setback. We could be looking at a recession there and a tough couple of years, but London is one of the world’s great capital cities, and we don’t anticipate that changing.
LEUPP: We are taking a contrarian, opportunistic approach to the valuations that the selloff has created. It was overdone.
SHIGEKAWA: Longer term it’s still unclear as to how this will all unfold. We are cautious today. Not only in the U.K., but also overall in Europe. We think a negative impact—especially to the financial services sector—is likely in the near term.
CHEIGH: We want to be more defensive in the kinds of companies we own, in niches such as storage, student housing, or health care. We want to focus on companies that pay attractive dividends, and not be so focused on companies with more office and residential development. With the rest of Europe, it makes us more cautious on the growth profile. It further highlights that Asia looks more attractive.
HALLE: We think London long term will be a good investment place to be. There are some very good public companies that are attractively priced, but we don’t have data points on valuation yet. It’s highly likely that international companies based in London will look to diversify into Europe and sublet a portion of their U.K. space, hence our investments in Dublin, Amsterdam and Frankfurt.
REIT: How are negative interest rates in many places around the world affecting your investment decisions?
HALLE: In the short term, it’s good for real estate because it’s driving capital from bank accounts to investment accounts. My concern is when rates are so low, investors stretch to get higher returns, and that creates risk in the market.
BEAM: It’s maddening. We are trying to help banks get back on their feet, but we are basically putting them out of business with negative rates. How is the economy going to get back to normal if we don’t have a banking system?
SHIGEKAWA: Negative interest rates in Europe and Japan are concerning for us. We don’t think the markets fully understand what could be the consequences of these policies in the market. We are already seeing negative interest rates are impacting the profitability of the banking system, further skewing asset pricing, including real estate.
CHEIGH: This phenomenon of negative interest rates is more just a symptom of how desperate governments and policymakers are to try to create some growth. It’s kind of telling you that it’s not working. Policymakers are going to have to make a transition to fiscal stimulus.
LEUPP: If they persist, the benefits for real estate valuations really are positive. Japan has had them the longest, without a meaningful effect on real estate valuations. If you are paying a lower interest rate, you are earning higher level of income on property. It means a level or maybe a modest positive for long-term-leased real estate valuations.
REIT: What regions excite you going forward?
LEUPP: One of them is North America. In the U.S., we see continuing steady demand and year-over-year earnings and dividend growth. We also see selected value opportunities in Canada and Mexico. From a growth standpoint, we also like developing Asia, such as the Philippines, and we are seeing value opportunities in Hong Kong.
HALLE: We like the U.S. in the short to intermediate term, where returns are consistent and have the highest risk-adjusted returns relative to other regions—not that valuations are cheap—REITs are fairly valued. Longer term, valuations in Europe and Asia are much more attractive, with earnings growth 18 to 36 months away.
SHIGEKAWA: We have a positive view on North America, primarily the U.S., where we’re seeing modest economic growth. The likelihood is that rates will continue to remain low in the medium term. The U.S. benefits from its safe haven status. There is volatility in global markets, and investors increasingly look to the U.S. in those periods.
BEAM: We are probably incrementally feeling the best about the U.S., U.K. and Europe. The EU is a place with challenges. But it’s also a place with tremendous opportunities. If you have conviction that things are getting better, I think it represents a really nice opportunity to put capital to work in great companies.
CHEIGH: Japan and Hong Kong have been real laggards. We would expect that with improving demand expectations and slowly increasing interest rates, that the fundamental value we see there is going to be realized.
I think property is the singular most brilliant investment you can make. But you have to get it at the right price.
– Joel Beam, Salient International Real Estate Fund (KIRAX)
REIT: What are your chief concerns these days about REITs around the globe?
BEAM: In a word, valuations. I think property is the singular most brilliant investment you can make. But you have to get it at the right price. It’s hard in this low-return landscape to say we have tons of price upside ahead of us.
HALLE: We have too many short-term investors in the REIT market. Some investors are buying REITs purely based on the dividend yield without regard to the underlying fundamentals of the business, asset valuations or balance sheets. Some of these stocks are at risk of significant price declines when we see changes in interest rates or bank capital availability.
SHIGEKAWA: Our biggest concern continues to be the impact of monetary policy in markets around the world. Interest rate cuts and quantitative easing are dramatically impacting asset pricing, including real estate. The cross currents of today’s unconventional policies have really added volatility in our markets.
CHEIGH: While I think Brexit is not going to materially change the demand for real estate, I also have to respect the fact that the U.K. is a top 10 economy globally. It creates uncertainty within Europe, which is just as big as the U.S. economy.
LEUPP: A possible macro shock, such as a regional war or large terrorist event, or shocks in the debt or equity markets. Then there’s the question of how would a recession affect retail, office and industrial demand. We don’t anticipate a lot of new supply in any particular sector in the coming years, but we’re always watching it.