Real estate as an asset class remains well placed in the current environment, with investors continuing to rotate from bonds into other yielding assets with growth potential.
A recent report by DTZ supports this, showing that there is currently $354bn of capital targeting the real estate sector globally. Europe is accounting for an ever increasing share of this: here, investors have moved up the risk curve with secondary assets and markets such as Spain and Ireland back in vogue. Within the listed property space we have seen a number of newly listed opportunity funds raising money on the equity market to exploit the potential in these markets, focusing on the distressed assets still emerging from overexposed banks.
However, our core focus remains Northern Europe. The UK property market has been a standout performer and has started this year as it finished the last. An impending City and West End office supply shortage, combined with an uptick in occupier demand looks set to force rents materially higher. With financial strength and development exposure, the UK real estate investment trusts (REITs) remain well positioned to take advantage.
In mainland Europe, we remain cautious on the outlook for retail landlords. Inflation is low, online sales are growing, and a nascent economic recovery offers little prospect for rental growth. However, we feel the French office market may soon offer some value with rents now bottoming out. Listed companies, such as Icade, may provide an opportunity to exploit this theme, with shares now trading at discounts to asset values. In Sweden, property fundamentals remain robust with relatively healthy gross domestic product (GDP) growth likely to feed through to capital values in the stronger cities. In Germany, we continue to see value in the residential stocks where demand for rented accommodation is driving modest, but reliable rental growth.
Following a strong run in recent years, we must ask how much of the good news is already reflected in share prices. Our view is that property shares while no longer cheap continue to offer value given the potential for rental growth as economies recover. However, increasingly successful stock picking will be required in order to exploit pockets of stronger growth and greater value.
Guy Barnard, Fund manager of the Henderson Horizon Global Property Equities Fund and Pan European Property Equities Fund