With compelling returns and an attractive income component, investing in listed real estate is becoming hard to resist.
Especially when one considers its historically low correlation to broad equity and fixed income markets. However, it wasn’t always popular. “In the old days, there were not many believers in listed real estate – but we have come a long way,” says Gerios Rovers, Executive Director of Cohen & Steers. The universe now consists of 575 companies, in 23 countries.
In order to take advantage of this, Nordea Asset Management partnered with the Cohen & Steers in 2011 to manage their Global Real Estate Fund, which has consistently outperformed in its category (Fund Property – Indirect Global) since its launch. In the past five years, the fund has grown from 5 to 604 million USD.
Currently, there are two macro factors that are giving real estate investments a boost: the reflationary environment, which is a potential driver for income and dividend growth, and the fact that real estate securities have demonstrated ability to perform well in periods of higher economic growth and higher interest rates. In times like these, listed real estate leads investors to liquidity, enabling diversification and conviction. “We like liquidity, we like to be flexible, and that is difficult to do in the private market. For diversification and flexibility, listed is best,” Rovers confirms.
Rovers is quick to reference the American Real Estate Investment Trust (REIT) business model, and its distribution of income as the other driving factor for listed real estate. “The US model used to be designed for mom and pop operations, but it is now completely institutionalized. If you want access to a mall, you have to go via a REIT.”
It’s not just the US that embraces REITs: 31 countries worldwide now have them, compared to only three in 1971. This is correlated to the significant growth sustained by the Global Real Estate Securities universe, which has caused market capitalization to surge from 110 billion in 1992 to $1.9 trillion USD in 2017. According to Rovers, there is a REIT for every single macro backdrop, be it retail, industrial, residential or health care.
Regionally, North America is commanding most interest because the corporates are doing well, and consumer spending, employment, and wages are all up. However, the properties most synonymous with consumerism are not what they used to be. The notable shift in the retail market is evident not only in the U.S. but also in Europe. According to Rovers “malls are getting bigger and bigger, while the small retail streets are withering. Consolidation in the retail space is occurring,” largely due to the rise in online shopping.
Rovers is busy withdrawing investments from office space, and into self-storage, logistics and student housing; geographically, Europe and Asia are weighted considerably less due to widespread political uncertainty, and Chinese deceleration.
For those wary of the real estate bubble that caused so much destruction a decade ago, Rovers is reassuring. “On the supply side, it is pretty much under control, simply because the financial crisis hit very hard for those companies that were building excessively. There was a fall out in demand – but now it is picking up,” he says. 2016 saw rental growth decelerate closer to the historical average, and certain sectors began to digest excess supply (coastal apartments, senior housing, hotels and self-storage).
Do the fluctuations in interest rates concern Rovers? Tangentially, no. “Rises in rates are not a problem – as long as you have liquidity stream that outpaces the rate increase.”
photo source: World Construction Network