Real Estate Research
Schroders Global Real Estate Conference 2016
Schroders welcomed almost 200 people to the 2016 real estate conference in London on 27 April. After another good year for real estate returns, we looked ahead to where the market would take us next.
The key themes remain
The five key themes through which we filter our approach to property investment remain unchanged:
- Rapid urbanisation
- Technological revolution
- Resources and power
- Shift from West to East
However, seldom has there been quite such uncertainty. Will China stabilise? Will the UK stay in the European Union? Is Angela Merkel likely to lose the next German elections? Is Hillary Clinton odds on to become president? Will Volkswagen be broken up? Is Dilma Rousseff going to be impeached? Can oil prices stay below $50 a barrel?
To win in the property market amidst this uncertainty requires excellence of execution, agility of action and the insight to know where the risks and returns lie.
The outlook for the global economy
The immediate future looks subdued:
- China’s “old economy” is heading for recession, but domestically focused sectors should more than fill the gap to maintain relatively low level domestic growth
- Falling oil prices have not boosted world trade and the global economy as expected, so we are looking for another year of global growth around 2.4%
- This may be the year that “helicopter money” finally arrives, as central banks by-pass the banks and start to pump liquidity directly into the economy
- The UK looks vulnerable to Brexit: the size of the twin current account and budget deficits means growth and inflation would both suffer compared to maintaining the status quo.
The outlook for European property
Ultimately, it all depends on the wider economy:
- In the UK, economic growth of at least 1.5% should mean overall property returns increase
- Selectivity is crucial: smaller shops, office space outside the City of London and multi-let industrial estates should continue to prosper
- Uncertainty over Brexit and yields near 2007 levels are causing nervousness, but healthy spreads over bond yields and low levels of debt provide defensive characteristics
- In Europe, recovery is gathering pace, supported by a yield gap over bonds wider than in the UK and widespread rental growth in a variety of cities.
Why active management matters
Trading, developing and refurbishing property has added to returns over the longer term. This is important at a time when property cycle is moving from capital growth to rising rents:
- Our portfolio preference is for “clever” towns and cities, which are attractive to growth businesses and affluent populations
- In London, we are focused on emerging areas, including Bloomsbury, Whitechapel, King’s Cross and Battersea.
- In the regions, City Tower (Manchester offices), Stacey Bushes (Milton Keynes industrial) and the Arndale Centre (Leeds retail) are all examples of active management increasing returns
- In a year when the focus is shifting to rental growth, having well-selected buildings in good locations with development potential should drive performance.
Building value in Continental Europe
The background is making for happier Europeans: employment is rising, retail spending is growing and the economy is (slowly) expanding.
- We are investing in cities where people want to be, where vacancies are low and rental growth is coming through
- Continental Europe is not one market: total returns from cities like Madrid, Barcelona, Berlin and Paris are significantly ahead of the rest of the market
- We seek future-proof assets, for example, growing technology companies, and areas with good infrastructure, a healthy quality of life, limited supply and affordable rents
- As in the UK, the market is moving from the capital to the income part of the cycle
Property alternatives are not high street retail, not mainstream offices and not traditional industrial property, but are areas like student accommodation, housing for the elderly and car showrooms:
- They offer inflation-beating income at a time when the cycle is moving towards rental growth
- They tap into several of our key themes, including social change, demographics, technology and urbanisation
- They can provide shelter from disruption elsewhere, for instance, car retailing remains aloof from the internet, while convenience retail is well insulated from the wider retail malaise
- They should be a way to ride new trends, such as self storage, car parks(??) and recycling.
The world’s “global cities” tap into all the key themes we’ve identified:
- Global cities like San Francisco, Boston, Stockholm, London and Shanghai will all grow significantly faster than their host countries over the next 10 years
- Typically, they will be characterised by a growing population, for example New York, London and Paris.
- Active managers need to focus on the areas of the city promising the best growth, such as central Manhattan: filled with office workers by day and entertainment seekers by night
- Listed property companies like Shaftesbury in London and Douglas Emmett in Los Angeles provide exposure to attractive cities with constrained supply and rising demand.