Investment Outlook - Global Opportunities
Global Real Estate: A Tougher Market
Higher property valuations worldwide are making real estate securities less attractive, while Dubai's debt woes highlight the sector's risks. So most investors will want to keep global real estate to a sliver of their portfolios, gain new exposure slowly with dollar-cost averaging, and stick to broad-based funds rather than country- or region-specific offerings.
The eye-popping returns since last March may be gone as investors already anticipate—and price in—a global real estate recovery. But experienced investors say there are still values to be found in Asia, Australia, Europe, and selected emerging markets such as Brazil. With credit markets stabilized, a shakeout is starting. For investors, that means there are chances to get in on distressed investments and to buy stronger real estate operators as they position themselves to acquire weaker rivals. Longer-term, real estate is a play on economic expansion: Growth means more demand for housing and office space, which will ultimately be reflected in higher (or at least stable) rental prices and lower vacancy rates. "The recovery is starting in Asia and working its way to Europe and the U.S.," says Thomas Bohjalian, a global real estate portfolio manager at New York-based Cohen & Steers, which manages $23 billion. "We don't believe there will be as much distress as people believed, but the opportunities will be large."
As the recovery takes hold in Asia, China, with its strong growth prospects, is a key focus. Michael Winer, manager of Third Avenue Real Estate Value Fund, which buys in the U.S. and overseas, has long looked toward Asia, and especially Hong Kong, rather than to U.S. real estate investment trusts. Among his fund's top holdings as of Oct. 31 is Henderson Land Development, a financially strong Hong Kong company also building in mainland China. Bruce Eidelson, director of real estate securities at Tacoma (Wash.)-based Russell Investments, likes China Resources Land, a Chinese residential developer listed in Hong Kong, as well as Henderson Land. "You're seeing a lot of activity in China because of the need for upgraded housing stock," he says. "The Hong Kong market, while it has performed exceptionally well, should still benefit from growth in China."
Asia's other major market, Japan, is another story. Its economy is stagnant and, until November, real estate traded at big discounts. "We think it is more fairly valued today than a month ago," says Cohen & Steers' Bohjalian. He expects Japan's real estate market recovery to lag behind that of Hong Kong and Singapore. "On a fundamental level, Japan is a late-2010 or 2011 story," he says. Investment managers say they are steering clear of J-REITs, or Japanese real estate investment trusts, that peaked in 2007 and have faced major financial difficulties. Instead, they favor real estate operators with the best properties and strongest balance sheets, including Mitsubishi Estate and Mitsui Fudosan. "We believe both are trading at double-digit discounts to what their real estate holdings are worth," says T. Ritson Ferguson, chief investment officer of ING Clarion Real Estate Securities (IGR), which manages a number of ING real estate mutual funds.
Australia, where the economy has held up and many property companies offer dividends of more than 7%, is also promising. ING's Ferguson likes Westfield Group, a mall owner; Dexus Property Group, a commercial developer; and Stockland, whose operations span office buildings, warehouses, and malls.
In Europe, the prime target remains the United Kingdom. While problems in the economy, banking sector, and property markets mirror those of the U.S., British property valuations are more depressed. "It's not that fundamentals are better than in the U.S., but that stock prices have taken a bigger hit. Companies there have been quite aggressive about marking down assets," says Russell's Eidelson. He likes Derwent London, a REIT that's focused on that city's West End office market.
Farther afield, Samuel Lieber, manager of Alpine International Real Estate, bets heavily on emerging markets and especially on Brazil, which represents 26% of his $754 million fund's assets. That big bet has helped Alpine International soar 124% over the past year. The Brazilian stocks Lieber likes include MRV Engenharia, which builds affordable housing; shopping mall developer Iguatemi; and Cyrela Commercial Properties. "Our international fund is heavily in emerging markets because that's where the opportunities are," says Lieber, whose Purchase (N.Y.) firm, Alpine Woods Capital Investors (ADINX), launched a separate emerging markets real estate fund last year. With Brazil scheduled to host the World Cup in 2014 and the Olympics in 2016, he says, "there's huge upside there over the next five years." And that, after all, is what all investors hope for.