As a keen follower of rugby union, it was tempting when thinking about the year ahead to try and predict the winners of the 9th Rugby World Cup. But the task of unearthing the best property markets in 2019 is sufficiently tough. I have high hopes for next year’s World Cup, not least because Wales are among the favourites to win it. As far as real estate is concerned, a number of current investment themes in the listed real estate sector should persist in 2019, with Asia and Europe likely in our view to have more return potential, albeit with added risk, than North America.
Exhibit 1: Market return estimates for the next 12 months* in local currency
* The return is calculated for companies in the FTSE EPRA Nareit Developed index, using average analyst price return expectations for the next 12 months and company dividend yields reported in Bloomberg. As a result of currency fluctuations, returns can increase or decrease. Source: Bloomberg, BNP Paribas Asset Management, as at 30/11/2018.
The search for growth will no doubt remain a preoccupation of investors and REIT (Real Estate Investment Trust) management teams alike, alongside the need for balance sheet discipline. The good news is that we expect most markets and sectors to experience growth in their earnings in 2019, even though generating additional income at this late stage in the real estate and economic cycle will likely be more challenging than in previous years. We expect REITs to redevelop, densify or intensify the use of existing buildings as much as acquiring or developing new ones.
The gap between high and low-quality companies has only been widening in recent years. High-quality companies, with good teams, access to capital and well-managed balance sheets, are going to keep on winning in this environment. More broadly, while we expect the gateway and high-barrier-to-entry cities to remain the strongest in 2019 both in terms of investment and occupancy, we believe it is going to be hard to bet against the US west coast markets, particularly in the office and industrial sectors.
Among the positive factors for real estate, we expect privatisations and merger and acquisitions to continue and perhaps increase in the listed real estate sector over the next 12 months. There are still high levels of capital looking to be invested across global markets and investment activity in eurozone real estate has remained strong. We believe, broadly, that the valuations of eurozone real estate companies are supportive across the sector as yield spreads over bonds and equity multiples compare favourably to historical averages.
The not so good
The global economy looks set to grow more slowly over the next 12 months, with European sentiment particularly damped by fallout from the trade conflict. Weaker demand in China alongside potential political upheaval in the eurozone and the gradual withdrawal of fiscal stimulus from the US economy in the second half of 2019, will be testing conditions for property markets across the world as well as the global economy.
There are risks ahead for real estate equities, particularly with the US Federal Reserve tightening monetary policy. The likelihood is that there will be more rate rises in 2019 despite more emollient tones from the Fed chairman in recent weeks. The trade war between China and the US remains a flashpoint for global risk despite the temporary truce agreed between Presidents Trump and Xi over a good supper in Buenos Aires. Elsewhere, the chaotic nature of the politics surrounding Brexit is increasing the risk that the UK will leave the EU in March 2019 without formal terms of departure, setting the country up for significant economic and financial market disruption. The potential market dislocation from a “no-deal” Brexit could be almost as severe for the continent as for the UK. Furthermore, the Italian government’s budget dispute with the European Commission is likely to persist until after the European Parliament elections in the spring and could trigger volatility across global markets.
And the rugby
While the winners on the rugby field will most likely come from two of the smallest real estate markets in the world, New Zealand and Ireland, with Wales an outside bet, neither of these countries would feature in our top picks for real estate investment in 2019.
Host nations usually do well in World Cups, but Japan will be a rank outsider in 2019. Its real estate companies should be among the better performers in 2019 and will most likely start the first half reasonably strongly, but run out of steam as the second half progresses.
The US is one of the least favoured countries for the Rugby World Cup and it is unlikely to be one of the better REIT markets in 2019. The outlook for the economy over the next 12 months is broadly stable, but there are headwinds for listed real estate companies. Fed rate rises should act as a brake on investor interest in rate-sensitive sectors such as US REITs. Moreover, in the underlying property markets, market participants acknowledge that the US real estate cycle has probably peaked.
The Rugby World Cup trophy is named after the alleged inventor of rugby, the Reverend William Webb Ellis. According to legend, while a pupil at Rugby School, he picked up the ball and ran with it during a school football match in 1823, creating the 'rugby' style. Germany may not be at the World Cup, but we expect it to pick up the ball and lead the challenge as the best listed real estate market in Europe. In contrast, the UK will be well represented at the event in Japan, but its listed real estate stocks remain weighed down by political uncertainty. UK companies and the currency are already relatively depressed, but a “no-deal” Brexit will push prices and sterling lower.
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