In Singapore, demand for office space has been muted, though one or two commentators had started to feel a little bit more positive for the latter. The Philippines, by contrast, is showing good levels of demand in residential, but stocks there are relatively illiquid and do not appear frequently in larger global funds. A number of managers highlighted a general trend - namely the unwillingness of banks to lend on real estate, hence constraining supply.
The search for yield has rendered prime real estate attractive in countries such as Germany, the UK and the Nordic areas, particularly relative to other asset classes, such as government bonds. On the whole, the reviewed funds did not deviate significantly from their benchmarks at regional or subsector level. All were either neutral or overweight retail, and most were near to benchmark in residential. Country-wise, there was little variation.
In southern Europe, the worst-performing residential market in the world in Q2 2012 was Ireland, with Portugal, Greece and Spain only marginally less depressed (each down over 10% year-on-year). Office rentals in Barcelona, Madrid and Dublin have also fallen sharply as a reaction to weaker economic activity and demand. In retail, top destinations such as London and Paris have proven resilient, but unsurprisingly, given Spain’s current economic plight, demand in Barcelona and Madrid has fallen.
The Robeco Property Equities Fund (upgraded to an S&P Capital IQ Gold grading), for example, purposely kept its regional weightings near to benchmark as the managers believe it is extremely difficult to call the cycle. They prefer to focus on identifying the best ideas within each region. However, there was a general consensus among global property equity managers that the outlook for the sector is very uncertain. The key factors remain the pace of the US recovery across all sectors, and growth in China.
The positive news is that the US housing market is showing signs of recovery, with fewer distressed sales, tighter supply and declining mortgage rates. Both Jim Rehlaender (SISF Global Property Securities) and the managers of the Invesco Global Real Estate Fund noted the current relative strength of the West Coast, fuelled by IT groups hiring.
