Global Property Market Outlook

Transcription

1 Global Property Market Outlook Q Paris

2 Executive Summary The outlook for the global economy remains positive with output expected to pick-up in 2017 along with inflation. These trends should support occupier demand at a point in the cycle where net income growth is likely to be the dominant driver of total returns. With uncertainty surrounding political events, monetary policy and economic trends, financial markets are expected to remain volatile throughout 2017, providing both upside and downside risks. Aberdeen s long-term pricing indicator shows overpricing risks are evident across regional markets, with the Asia-Pacific (APAC) market appearing the most overpriced. While the Eurozone market remains overpriced, it continues to be closest to our estimates of long-term fundamental value. Current financial environment The outlook for global economic growth remains positive, with gross domestic product (GDP) expected to expand by 3.5% and 3.7% in 2017 and 2018, respectively. This represents a significant uptick from the 3.1% recorded in While the broad global outlook remains unchanged, the regional picture has altered since the start of the year. Growth expectations for the U.S. have been downgraded, reflecting the challenges facing President Trump in implementing his fiscal agenda. In contrast, growth expectations for the Eurozone have improved following a strong start to 2017 the region s economy expanded at its fastest pace for 10 years in the first six months of Despite inflation remaining subdued, the signal from the majority of central banks is that they are likely to "look through" low inflation when setting monetary policy; they are more likely to focus on above-trend growth rates, diminishing slack in the economy and financial stability concerns. This suggests that markets could be at an apex of global monetary policy as more central banks seek to normalize policies. The Federal Reserve (Fed) is leading this process: increasing interest rates by a further 25 basis points (bps) in June and informing markets of its intention to reduce the size of the balance sheet later this year. In the Eurozone, the European Central Bank (ECB) rhetoric turned more hawkish with a tapering in the monthly asset purchases expected around the turn of the year. These changes suggest financial markets could be at the start of a period of upwards pressure on interest rates from central banks. While the global outlook has improved, risks around base-case expectations (on the upside and downside) remain unusually high given uncertainty over President Trump s policies, political risk in Europe and concerns over the unbalanced growth of China s economy. Market prices versus fundamental value Global real estate prices look stretched versus estimates of fundamental value. Aberdeen s long-term pricing indicator suggests that global capital values are 26% above our estimate of fundamental value, on average. According to our long-term indicator, core assets in the APAC region (34% overpriced) appear more overpriced than in Europe (25% overpriced) and North America (23% overpriced). Global residential (4% overpriced) and industrial (16% overpriced) markets appear to offer the greatest potential for good risk-adjusted returns at this point in the cycle, with the office sector the most overpriced sector globally (41% overpriced). Our long-term indicator reflects the balance of short-term interest rate movements, capital values and rental growth assumptions. Global prices relative to fundamental value were up marginally in the second quarter driven by a further increase in market prices. Chart 1: Aberdeen s global pricing indicator (Market price as a percentage of fundamental value) % Q Q Q Q Q Q Q Eurozone Japan UK USA Nordics Q Q Q Q Canada Global Note: Market price is scaled against the fundamental value for each market at the same date. Fundamental value is a proprietary estimate for Aberdeen and is defined as the discounted cash flows provided by that market based on longterm capital market assumptions, independent of currency or stock selection effects. Source: Aberdeen Asset Management, August We calculate our long term leading indicator for over 70 country / sector combinations globally. The indicator does not translate into a short-term market forecast because momentum and investor sentiment can lead to marked and prolonged periods of over or underpricing. Our pricing calculations only indicate how stretched prices are relative to fundamentals. Prices do not need to fall or rise for our indicator to reach a neutral position. A change in income growth expectations or in the risk free interest rate, can also lead to such adjustment, or indeed a combination of all three. We use the indicator to establish risk tolerance at a very broad level. We use similar methods at a more granular level to establish the risk tolerance for the mandates we run. 02 of 08 Global Real Estate Strategy - Q3 2017

3 Market behavior explained by shortterm indicators Market prices can, and often do, deviate from fundamental value for indefinite time periods given behavioral factors. We aim to monitor market behavior via our short-term capital value indicator, which helps us understand the drivers of prevailing market prices (see table 1). Despite signs of overvaluation in key regions, capital flows for institutional global real estate appear favorable. That said, investor sentiment towards the U.S., UK and Asia has softened in recent quarters. Investors are concerned that current prices may limit future return potential. Continental Europe stands out as the brightest spot: investor confidence remains high. In the listed market, global pricing remained flat in the first half of There were some regional differences, though, with European prices up 5% compared to a decline of 5% in the U.S. and 1% fall in APAC. In terms of prices compared to net asset values (NAV), UK stocks are trading at a 16% discount compared to 2-5% discounts across other major markets. In terms of sectors, clear investor themes are evident globally with retail and office sector-specific stocks trading at 12-16% discounts to NAV compared to residential or industrial-focused stocks trading close to or at a premium to NAV. Lending terms remained broadly unchanged following a tightening in UK and U.S. markets during recent quarters. Financing remains difficult to secure on assets outside of the "core" segment and lenders are sensitive to downside risks, particularly in regards to developments. This offers opportunities to those investors/lenders willing to take a different view. The rental growth outlook is broadly positive for global markets, although the UK and Hong Kong are the notable exceptions where rents could experience downward pressure in the short term. The UK outlook reflects weaker investment sentiment and an uncertain outlook for occupational demand. The recent rise in bond yields has squeezed global spreads to property, with evidence in the U.S. that weaker assets are trading at higher yields. Global overview Despite significant amounts of money targeting global real estate markets, investment volumes appear to have peaked in Pricing has not followed volumes and the majority of markets are currently at levels at or above previous peaks. This trend may indicate that investors are more cautious in underwriting investments and that there are very few forced sellers creating a mismatch in price expectations between buyer and seller. In occupier markets, supply pipelines remain relatively tight across the majority of core developed markets and risks of a supply induced correction remain relatively low. At a local level, there are some supply risks materialising, which means that local knowledge and bottom-up asset selection are as critical as ever for strategy implementation. A robust outlook for global growth should support occupier demand as the property cycle moves to a period of moderating total returns; net income growth, rather that falling yields, will be driving return expectations. The change in rhetoric from central banks suggests that a floor for property yields may have been reached. While upward pressure in risk-free rates typically feeds through to property yields, the relationship is not 1:1; changes in property market fundamentals (i.e. income growth expectations and risk premiums) are just as key in influencing market pricing. At this point in the cycle, core prices appear stretched relative to estimates of fundamental value (Figure 1). Where market prices are above fundamental value, this implies that investors are not being adequately compensated for risk. This suggests that investors may want to adopt a lower-risk profile at this point in the cycle and make selective sales to re-position portfolios accordingly. Table 1: Aberdeen s short-term indicator of capital values Q3 17 REITs Availability of funding Economic outlook Rental Value Outlook Bond vs Prop Yields Property investor sentiment Expected direction of shortterm capital values USA + Canada Eurozone Nordics France Germany Italy Spain UK - + Australia Japan + Singapore Hong Kong - - Global Note: The direction of capital values is determined by the net result of six indicators, with additional weighting applied to property investor sentiment. + indicates positive price pressure; - indicates negative price pressure; no symbol (+ or -) indicates no clear signal. Source: Aberdeen Asset Management, Aug Our short-term leading indicator is a composite indicator of capital return over the next 6 months, including factors such as stock market performance, spread to bond yields, investor sentiment, etc. aberdeen-asset.us 03 of 08

4 Regional outlooks North America The fundamentals of the U.S. economy remain positive, particularly regarding a buoyant labor market. Rising wages, healthy household balance sheets and relatively low interest rates should support consumer spending. However, GDP growth expectations for 2018 have been revised down to 2.4% from 2.7% last month. This reflects a downgrade to expectations for President Trump s fiscal stimulus package, given recent political arguments and a busy congressional agenda. U.S. property markets have experienced a sustained period of positive net absorption, which has driven vacancy rates lower and rental values higher. Growth in net operating income remains robust at 5.2% year on year with the industrial sector recording growth of 7.5% year on year in the second quarter of However, higher completion rates in recent quarters for office, logistics and multi-family sectors indicate lower rental growth expectations for 2017/18. Local imbalances are evident, such as an oversupply of Grade A apartments in some gateway markets, which have led to a decline in rental values. Concerns over the retail occupier markets remain, particularly secondary shopping malls anchored by department stores. The NCREIF Property Index recorded a total return of 7% over the 12 months to June This reflects a continued moderation in the rate of capital growth with values up by 2.2% in the 12 months to the second quarter of Investment volumes are down 8% year on year for the first half of This reflects a greater degree of caution from investors, who are adjusting their return expectations in light of tightening monetary policy and uncertainty over the economic policies pursued by President Trump. Weaker pricing trends for retail assets were evident in the RCA/Moody s Commercial Property Price Indices (CPPI), with transaction-based prices down 2.4% year on year to May, compared to an average increase of 7.3% across the U.S. market. Aberdeen s global pricing indicator suggests that the U.S. residential (7% overpriced) and industrial (16% overpriced) sectors are more attractively priced than the office sector (40% overpriced). The retail sector (14% overpriced) continues to experience structural headwinds, particularly secondary malls. In Canada, our indicator suggests that the retail (7% overpriced) and industrial (18% overpriced) sectors are more attractively priced than the office (51% overpriced) sector. UK The UK economy has started to show signs of slowing with GDP expanding at a disappointing 0.3% during the second quarter. The economy expanded at a rate of 2% year on year in 2016, with expectations for growth to slow to 1.7% and 1.5% in 2017/18, respectively. Higher inflation is expected to squeeze consumer spending, with real wage growth turning negative despite an unemployment rate that is at its lowest level since The depreciation in Sterling should improve the UK s net trade balance but is expected to only partially offset weaker domestic demand. Office occupiers have started to adopt a more cautious approach to leasing, which may translate to weaker rental growth despite lower levels of supply. Central London prime office rents have declined 3-5% since June 2016, with an increase in supply and weakening occupier demand weighing on rental values. Demand for big box and urban logistics remains firm with evidence of strong rental uplifts being achieved at rent reviews. Structural headwinds for retailers present challenges for landlords in maintaining income. The MSCI/Investment Property Databank (IPD) UK Monthly Index reported a total return of 2.5% for the first quarter of The industrial sector outperformed other sectors, with a return of 4.6% compared to 1.9% for offices and 1.8% for retail, respectively. Investor sentiment has improved since June 2016; activity in London is dominated by capital inflows from the APAC region, with a number of large office transactions completing at strong prices. Net initial yields for UK retail and office sectors remain 40bps above levels recorded prereferendum. Industrial yields have declined 10bps to 5.3% with competitive pricing. The Aberdeen long-term pricing indicator continues to suggest that the UK market is 30% overpriced, on average. This suggests that investors may want to adopt a lower-risk strategy at this point in the cycle. Central London offices are the most overpriced sector (+90%), with industrial (+18%) and residential (+4%) closer to estimates of fair value. Continental Europe Eurozone "hard" economic data seems to be catching up with strong "soft" business surveys in painting a positive picture for the region s economy. GDP growth of 2.2% is expected for 2017, up from 1.7% recorded in High consumer confidence is likely to support household spending as the labor markets continue to tighten. The electoral successes for President Macron in France have eased investor fears of further "populism risks." Core property markets remain in strong demand from investors, with competition for a shrinking pool of assets pushing down yields to 2006/07 levels or below. Amid the political uncertainty, prime property is highly valued for its apparent defensive properties. We expect yields to be pushed down further in the short term but for the yield impact on capital growth to moderate as the year progresses. Prime net yields across commercial sectors are 30-70bps lower across major Eurozone cities for the 12 months to the second quarter of 2017; prime capital values rose by 8-15% over the same period. The MSCI/IPD transaction linked index covering core assets reported capital value growth of 4% across all sectors, with prices for multi-family assets up 7.1% in the 12 months to March Rental growth expectations remain lower than in previous recoveries, but some core markets are experiencing tight supply conditions leading to strong rental growth. In contrast, secondary locations and out-oftown markets across office and retail sectors remain oversupplied with significantly lower income growth potential. Aberdeen s global pricing indicator shows the Eurozone (19% overpriced) as the least overpriced region globally. However, market prices are rising and moving further away from our estimate of fundamental value, which indicates that investors may want to adopt lower risk strategies. Residential, urban industrial and convenience-anchored retail may provide better opportunities for risk-adjusted returns at this point in the cycle. Asia-Pacific The Japanese economy is expected to benefit from supportive fiscal and monetary policies, stronger domestic demand and corporate investment. But the positive impulse from net exports is expected to slow, which reflects a moderation in China s growth. 04 of 08 Global Real Estate Strategy - Q1 2017

5 Economic growth in the wider APAC region is expected to maintain a robust pace of expansion amid supportive fiscal and monetary policies, and an easing in concerns over a potential trade war between China and the U.S.. Modest policy tightening in China appears to be gradually cooling the service sector, suggesting a softening in GDP growth further ahead. Demand for commercial real estate in mature APAC markets continues to run ahead of long-term averages. Demand for office space in mature economies has showed consistent strength over the past 12 months and this has been reflected in a broad-based growth in rental values. Rising levels of supply in the APAC logistics/ industrial market have eased rental inflationary pressures despite robust demand. Subdued occupier demand from retailers that face structural challenges from e-commerce has created a polarized market, where higher-quality locations have experienced stability in rents while weaker locations suffer deflationary pressures. Investor appetite for core income-producing assets has pushed prime yields down to historic low levels of around 3%. This downward trend has driven strong capital value growth for prime assets, particularly in Australia and Japan. The downward trend in yields and the pace of capital growth are expected to slow as high prices and rising interest rates affect investors underwriting assumptions. Aberdeen s pricing indicator suggests that the APAC region is one of the most overpriced regions globally. Market prices are estimated to be 34% above fundamental value, on average, meaning that finding value for core, income producing assets is challenging. Our analysis of market pricing compared to fundamental value indicates that the region s industrial (22% overpriced) and retail (22% overpriced) markets potentially offer better risk-adjusted returns for investors than the office market (51% overpriced). That said, investors should be wary of a potential slowdown in retail sales and maintain a watchful eye on logistics supply pipelines. Non traditional sectors, such as student accommodation and nursing homes, may offer more value to medium term investors; selective residential markets may be attractive too. Summary At this point in the cycle, long-term fundamental value remains hard to find in global, core, real estate markets. For existing owners, opportunities exist for profit taking in overpriced markets as investor demand remains favorable. We maintain our view of an overweight position in continental European markets from a global allocation perspective, given regional pricing versus fundamental value. Nick Colley, CFA Global Property Analyst CFA and Chartered Financial Analyst are trademarks owned by CFA Institute aberdeen-asset.us 05 of 08

6 Berlin, Germany 06 of 08 Global Real Estate Strategy - Q1 2017

7 Contact us Kimberley Woolverton Lars Graneld Jonathan Matson IMPORTANT INFORMATION PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RESULTS Issued in Europe by Aberdeen Asset Managers Limited which is authorised and regulated in the United Kingdom by the Financial Conduct Authority. Issued in Singapore by Aberdeen Asset Management Asia Limited, Registration Number E. Issued in the United States by Aberdeen Asset Management Inc., a registered investment adviser with the Securities and Exchange Commission. Issued in Canada by Aberdeen Asset Management Inc., registered as a Portfolio Manager in the Canadian provinces of Ontario, Nova Scotia and New Brunswick. This document is strictly for information purposes and should not be considered as an offer or solicitation to deal in any of the investments mentioned herein. The market or investment views expressed in this document do not constitute the provision of a personal recommendation nor are they intended to be read as research or other information recommending or suggesting an investment strategy, explicitly or implicitly, concerning financial instruments or the issuers of financial instruments or should they be read as an opinion as to the present or future value or price of any such instruments. This document does not constitute investment research, as defined under EU directive 2003/125/EC. Consequently, this document has not been prepared in line with the requirements of any jurisdiction in relation to the independence of investment research or any prohibition on dealing ahead of the dissemination of investment research. Any research or analysis used in the preparation of this document has been procured by Aberdeen for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. Readers must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and such independent investigations as they consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. The information herein shall not be disclosed, used or disseminated, in whole or in part and shall not be reproduced, copied or made available to others. Investments in property may carry additional risk of loss due to the nature and volatility of the underlying investments. Real estate investments are relatively illiquid and the ability to vary investments in response to changes in economic and other conditions is limited. Property values can be affected by a number of factors including, inter alia, economic climate, property market conditions, interest rates, and regulation. aberdeen-asset.us 07 of 08

8 Ref: US PHL 08 of 08 Global Real Estate Strategy - Q3 2017