Better managed companies with financial flexibility and good quality portfolios are likely to outperform
Continued recovery in the global economy is likely to be the key driver for the real estate stocks this year and next, according to LaSalle Investment Management (“LaSalle”). Almost all of the developed economies are now expected to show positive real GDP growth in 2010 and beyond, which will strengthen earnings and improve values in the real estate sector.
Global GDP is expected to rise 3.2% in 2010 and another 3.4% in 2011, according to Global Insight, LaSalle’s source for economic forecast data. Consumption is expected to grow 2.1% in 2010 and another 2.7% in the following year. The U.S. is expected to recover nicely, although in most European countries, recovery is likely to be more muted as the recession was more muted there.
LaSalle expects earnings of the global real estate companies in its investment universe to fall around 4% in 2010, with the weakest earnings from U.S. REITs. In 2011, the earnings of U.S. companies should grow, which will increase earnings in LaSalle’s universe to 4% in 2011, with stronger growth in 2012 and 2013.
Ernst Jan de Leeuw, head of European Securities, LaSalle Investment Management said, “As the global economy strengthens, the European real estate sector should benefit in terms of stronger earnings and improved values. Better managed companies with financial flexibility and good quality portfolios are likely to outperform due to stronger organic growth and the possibility to acquire accretively. Investments in these companies offer good current income protected by the value of real assets, and an expectation that dividends will grow as real estate markets recover.
The final key driver in the real estate sector for this year and next is continued capital availability supporting the stronger global real estate companies as they renew expansion. 2009 proved to be an excellent year for capital raising, with more than US$50 billion raised by public real estate companies in equity and rated debt, along with additional funds in mortgages and lines-of-credit. Capital markets continue to be receptive to the offerings of global real estate companies, particularly the U.S. debt market, but with capital raises throughout the world. More than US$5 billion in rated debt has been raised thus far in 2010, along with more than US$1.5 billion in equity raised by public real estate companies in the U.S., the U.K., Switzerland, Austria, and Japan. LaSalle expects this trend will continue through 2011 and beyond, with variations among regions.
The stocks of the companies in LaSalle’s global investment universe are trading near their long-term average premium to the value of their assets. LaSalle believes that, in many instances, these valuations may benefit from lower capitalisation rates as the year progresses. While volumes remain near historically low levels, real estate transactions are increasing in most markets, with buyers becoming more aggressive and debt financing more readily available. In addition to the shopping center acquisition mentioned earlier, Unibail-Rodamco also sold five shopping centers in the Netherlands to Wereldhave for about US$340 million. A number of transactions totaling nearly US$1 billion were announced in Australia, Japan, Singapore, and Hong Kong by both publicly-traded and private investors, and included office, residential, retail, and hotel properties.
Global real estate stocks and the broad stock index were off to a slow start in January; however, both global real estate securities and broad equities market made some progress in February, with the UBS Global Investors Index of real estate stocks up 3.2% and the MSCI World Equity Index of broad-market stocks gaining 2.0% (all returns stated in local currencies).
European real estate stocks in February
With mixed economic news out of the U.S. and concern over Greece’s government debt, European markets generally moved sideways during February. Continental European real estate stocks were marginally lower. Unibail-Rodamco underperformed after announcing in-line annual results but very cautious expectations for 2010.
Unibail-Rodamco also announced the acquisition of completed and development shopping centres in France and Poland amounting to nearly $1 billion USD. U.K real estate stocks were marginally ahead but underperformed the broad U.K. market. Earnings reports are coming in as much as expected.
LaSalle Investment Management (Securities) manages US$7.2 billion (as at 31 December 2009) in assets for a diverse client base around the world. The group invests in publicly-traded real estate securities in North America, Europe and Asia Pacific. This forms part of LaSalle’s total global assets under management of US$39.9 billion as at 31 December 2009
###
About LaSalle Investment Management
LaSalle Investment Management, Inc., a member of the Jones Lang LaSalle group (NYSE: JLL), is a leading global real estate investment manager, with approximately $40 billion of assets under management (as at Q4 2009) of private and public property equity investments. LaSalle is active across a range of real estate capital and operating markets including private and public, debt and equity and our clients include public and private pension funds, insurance companies, governments, endowments and private individuals from across the globe. For more information, visit www.lasalle.com.
