A safe haven in volatile markets

Dramatic movements in global stock markets typically throw up the salient differences between equity investments and real estate.

Portfolio allocation to real estate has steadily risen since the Global Financial Crisis as investors seek to take advantage of the low correlation between the asset class and equity markets. Volatility in the global markets, in part caused by government monetary and fiscal policies, has increased the attraction of real estate as an investment.

During the financial turmoil in China in June and August, investment decisions were postponed as uncertainty gripped international markets. While there were pockets of investors who reallocated capital from real estate to meet short-term obligations, others were seeking opportunities in a distressed environment.

Stuart Crow, Head of Asia Pacific Capital Market at JLL said: “Whilst there may be a denominator effect with falling equity markets, there is so much capital in the market looking for core assets, that those deals will continue. Where we may see some difficulty is in more opportunistic deals, and for which debt may be more difficult to access in some markets.”

Two factors will impact the outcome of the stock market volatility on the real estate markets, says Crow.

Firstly, investors are likely to continue to be attracted to real estate as a source of stability and income stream particular from core assets. Secondly, the potential impact to the real estate market is likely to be a reduction in debt availability as banks allocate regulatory capital in the most efficient manner, Crow explains.

In volatile markets, rising risk premium may lead to increases in the cost of debt despite the central banks cutting base rates, and the potential that the US Federal Reserve could keep rates on hold for longer than previously expected, when a tightening was signaled in the latter part of the year.

Elsewhere central banks are in accommodative mode maintaining the attractive spread of real estate yields over other asset classes for the medium term.

The aftermath of a crash often leads investors to reappraise risk and revisit performance expectations of each asset class. Over the past 10 and 15 years, private real estate returns have outperformed the S&P 500 and the Dow Jones Industrial Average. Real estate returns generally do not move in tandem with the returns of bonds, equities or even public REIT. As a result, the asset class’ low correlation with other instruments in investors’ portfolios provides significant diversification benefits.

This low correlation is in part due to valuation methods. Private real estate utilises an appraisal-based valuation approach, which tends to be much less sensitive to short-term stock market volatility.

“Investors faced with real-time decisions to sell or hold stocks in the face of constantly changing pricing information can take comfort that part of their portfolio – that invested in real estate – is relatively immune from short-term price swings,” says Megan Walters, Head of Capital Markets Research in Asia Pacific.

As investors scaled back expectation of an interest rate hike in the U.S., market focus continued to be on China’s economy. Recent JLL office leasing data from landlords underpinned the view that the services sector is growing as the economy matures and the government is targeting a 7 percent economic growth in 2015.

“In China, policymakers have room to further loosen policy substantially,” says Walters. “The lending rate still remains relatively high in China even after a series of cuts since last November. Based on the budget projections, a sizable boost from government spending is expected in the second half of this year.”

“The wild card in this game is the extent to which the Chinese government continues to intervene in foreign exchange and stock markets both indirectly via regulations and directives, and directly with cash to support the market,” she adds.

Source: Joneslanglasalle 28th August 2015

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

A safe haven in volatile markets

Comments

Leave your comment