The outlook for profit and dividend growth for real estate companies around the world generally remains positive, but differing macroeconomic influences, as well as varied local supply and demand trends, suggest that fundamental outcomes will differ by market and even within property segments in markets.
Investor concerns continue to be dominated by potential changes in long-term interest rates in the United States (U.S.), monetary policy in Europe and Japan, and specific property market policies in Asia.
Strength Among Various Global Real Estate Markets
As we survey real estate markets globally, we see pockets of strength currently in office markets such as Stockholm, Sydney, Tokyo and Hong Kong. We think rent growth is also likely to bolster operating performance for rental apartment landlords in Germany and for high-quality retail property portfolios in Europe and Australia. Meanwhile, expanding tourism trends should support continued strong revenue growth for hotel property owners in Spain. Due to strong demand from e-commerce tenants, we expect positive trends to continue in many industrial markets in Europe, the United Kingdom and the United States.
Nonetheless, there are certainly areas of concern. Uncertainty regarding the consequences of the United Kingdom’s Brexit referendum vote to leave the European Union make forecasting London, office occupier demand trends difficult.
Properties have continued to trade firmly in the investment market, however, due in part to the positive effect from the devalued British pound. In Singapore, we expect rents to remain soft for most property types, and our outlook for Hong Kong luxury retail properties remains negative, even as recent data suggested signs of stabilization in tenant sales. Hong Kong also recently introduced additional stamp duties, aimed at non-local residential buyers and speculators, that may cause a change in pricing trends that have been positive recently.
Potential Dividend Growth in the U.S.
In the largest segment of the market, U.S. real estate investment trusts (REITs) continue to report strong growth in portfolio operating profits, commonly measured in the US REIT market by same-store net operating income (‘same store NOI’) growth. However, in sectors with shorter lease durations—hotels, storage and rental apartments—growth rates have remained positive but are decelerating, a trend we expect will continue. Job growth and moderate-to-low levels of construction should support revenue growth across most U.S. property sectors. Leverage has remained low in the context of historical ratios, and, accordingly, we anticipate these sectors’ generally strong record of growing dividends has the potential to continue in 2017.
Renewed Political Appetite for Infrastructure Investment
Policymakers around the world appear to be renewing their interest in making infrastructure investments as a fiscal stimulus to seek to lift economic growth rates, while also improving overall economic efficiency and their constituents’ quality of life. Low funding costs currently provide further incentive, but often governments’ spending capacity is limited due to budget constraints and the enormity of the capital required.
We think significant private capital investment would be essential for policymakers to achieve their goals, and this would be good news for many listed infrastructure companies.
Investors Look to Clean, Renewable Energy
Relative to electric utilities in general, we expect relatively higher financial growth rates from renewable power companies, which we believe remain generally well positioned for the global transformation toward cleaner energy sources. Lower costs and greater efficiency, coupled with supportive regulatory policies, are creating attractive capital investment opportunities, in our view. We think challenges remain for utilities that have greater reliance on coal and nuclear generation.
The trend toward cleaner energy sources has provided capital investment and growth opportunities for many energy infrastructure companies in North America, as demand for pipelines and other facilities serving natural gas producers has been strong. We think long-term contracts may provide stability for relatively higher dividend distributions with the potential for inflation-linked growth, and those with construction capabilities appear to us to be well positioned for potential public policy initiatives that target improving infrastructure.
What are the risks?
All investments involve risks, including possible loss of principal. Investing in real estate securities involves special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.
Investments in REITs involve additional risks, since REITs typically are invested in a limited number of projects or in a particular market segment they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Investments in infrastructure-related securities involve special risks, such as high interest costs, high leverage and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in utility company securities, if purchased for dividend yield, involve additional interest rate risks. When interest rates have risen, the stock prices of these companies have tended to fall.
Special risks are associated with foreign investing, including currency rate fluctuations, economic instability and political developments. The risks of foreign investing may be greater in developing or emerging markets.
By: Wilson Magee
Resource: Franklin Real Asset Advisors