The U.S. financial crisis in 2008-2009 left many investors with a reluctance to take investment risks, particularly those related to any of the world’s wilted housing markets. However, as your local real estate agent would likely tell you, the market in one location can be vastly different than it is in another. Wilson Magee, Director of Global REITs at Franklin Templeton Real Assets Advisors, would agree that the adage “location, location, location” applies not only to individual home buyers and sellers, but to investors seeking opportunities in the commercial real estate sector, too. While real estate went bust in some areas of the world, it continues to boom in others. For that reason and others, Magee believes global Real Estate Investment Trusts (REITs) are worth a look.
In uncertain times, investors tend to look for perceived “safe havens,” such as government bonds. But perilous mountains of debt in many developed economies thought to be relative safety zones have made investors rethink whether “safety” is really obtainable or just an illusion. And, the ultra-low interest rate environment in the U.S. and many other economies has caused yield-seeking investors to rethink the cost of “safety” and their views of risk. For some, dividend-paying stocks have fit the bill. Magee says that dividends are among the potential benefits of REITs (companies which own, and in many cases, operate income-producing real estate), too.
“Dividends have been an important source of real estate returns. In the U.S. REIT market over the last 20 years, dividend growth has averaged 7% per year, well in excess of inflation, which has averaged about 2.5% per year1. And growing dividends further differentiate listed REIT investment from fixed income.
In addition to an attractive income stream, real estate securities can also offer several key investment benefits, including diversification from traditional asset classes and liquidity. Additionally, because real estate cycles of different countries are relatively distinct and generally have low correlations with one another, we believe investing globally can help reduce volatility.”
Magee’s job involves scouring the globe for potential real estate opportunities. You may be surprised to learn where he’s been finding these potential pillars of real estate investing strength—and why.
“The year 92012) also saw generally strong investment performance for property stocks in Europe and the United Kingdom despite the significant economic and fiscal challenges that remained. Arguably even less driven by fundamental growth than the performance in the Asia-Pacific area, property companies in the Eurozone generally reported stable operating conditions amid the uncertainties swirling throughout the region.
The Road Ahead
Magee thinks the U.S. might experience the strongest fundamental property trends among developed markets, but he sees positive signs globally, too.
“While U.S. property stock prices overall have rebounded to pre-global financial crisis peaks, this has been supported by strong fundamental operating recoveries, led initially by rental apartments and hotels, and now permeating most property sectors. As in many markets globally, positive top-line growth trends generally have been magnified by consistently declining finance costs, leading to increased profitability. This overall trend of improving profitability coupled with healthy balance sheets has encouraged many property companies to raise dividends.
In our view, valuations are attractive and earnings trends have been generally positive. We think those earnings trends are likely to continue for the next several years because construction in most of the major markets is very low, and we think this means less competition. Given the long development lead times before projects typically are delivered, we feel we can be confident in that view.”
For the multitudes of people and investors whose livelihood is tied to real estate, that should be music to their ears.
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What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
1. For 20 years ended Dec. 31, 2012. Source: NAREIT. “NAREIT®” is a trade mark of the National Association of Real Estate Investment Trusts. Inflation as measured by CPI. Past performance is not indicative of future results. Indexes are unmanaged and one cannot directly invest in an index.