Healthy Outlook for Global Real Estate Sector
Global real estate delivered healthy total returns in 2012 relative to global equities. The FTSE EPRA NAREIT Developed Rental Index, which measures the performance of global rental real estate securities, returned 22.54% for the year, compared to 15.53% for the MSCI World Index, which measures the equity performance of global developed markets.
We expect strong performance for the global real estate sector will carry forward as we continue to move through what we view as a traditional multi-year up-cycle following a trough in the market. A backdrop of low, but positive, global economic growth, aligned with a falling cost of capital, converged as the positive drivers, more than offsetting ongoing global macro headwinds that surfaced over the course of the year.
For 2013, we expect improving global economic growth will facilitate further increases in real estate cash flows through higher property occupancies and, in cases where occupancy has reached equilibrium, higher rents. Regionally, these positive space market dynamics are most evident in North America and Asia-Pacific excluding Japan, while Europe remains more challenged. Moreover, we expect continued low levels of new supply to act as a multi-year tailwind, as well as constraints to construction financing driven by stricter financial regulations; Basel III, for example, will play a key role in this dynamic.
Very accommodative monetary policies by the world’s central banks have helped lower the cost of debt capital. Debt issuance by publicly traded real estate companies remains robust and continues to be executed at very attractive terms and rates. In the intermediate term, companies should be able to continue to take advantage of the current dual competitive advantages of both access to and cost of capital. Through year-end, we expect North American companies to be more active on the external growth front than their global peers as they continue to utilize their low cost capital and better positioned balance sheets to fund acquisitions, redevelopment, and selective development.
The Duration of the U.S. Up Cycle Looks Favorable
Looking at the last 41 years of performance, up market cycles for REITs have lasted about seven years. The current cycle (4 in the chart) began in March 2009, and has produced strong average annual returns of 28%, 28%, 8%, and 18% for 2009, 2010, 2011, and 2012 based on the broad FTSE NAREIT Equity REITs Index.
NAREIT Equity REIT Total Return Index. Period ending December 31, 2012. Source: NAREIT, Duff & Phelps Investment Management.
Past performance is no guarantee of future results.