Real estate is a favoured asset class, says IPD Global Intel

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p developmentRising capital flows and strong performance across most markets have again made real estate a favoured asset class, according to MSCI’s new IPD Global Intel product.

Global returns averaged 8.4 per cent over the past four years, with pricing back to levels last seen in 2007/8 in many markets.

The strong performance of recent years has continued into 2014. In three markets (UK, US, Ireland) for which a quarterly series is available, annualised returns at Q2 2014 ran at double digit levels. Together these markets provide a useful, if more volatile, indicator of the likely trajectory of the IPD Global Property Index through the year.

Although many markets continue their strong run, others continue to lag, certainly to the end of 2013.  Thirteen of the countries in the IPD Global Property Index, all in Europe, experienced some capital declines over the year, with the worst affected being Spain, Netherlands, and Portugal. The Asian markets performed far more strongly than Europe, although the formerly strong markets of China and Hong Kong experienced a slowing to 8.0 per cent and 7.3 per cent respectively, putting them more in line with the overall IPD Global Property Index.  Though resilient during the financial crisis, these markets were dragged back by run-ups in pricing over recent years, low income yields, and concerns over excess supply.

Increasingly aggressive pricing of markets poses a notable risk for real estate investors, particularly in the context of rising bond yields. The IPD Pricing Indicator across all markets in the IPD Global Property Index shows that real estate is more aggressively priced than at any time over the past five years, but not as severe as the peak years of 2007/8. This indicator represents the average across all markets and conceals more aggressive pricing for some markets, particularly Canada, UK and the US. A further risk relates to the potential for markets to continue their recent strong runs. Canada, the US, and South Africa have posted returns near or above their long run averages for each of the past four years.  Other countries such as Hong Kong have seen momentum ease during this period. Still others, such as Ireland and perhaps Japan and Spain, hold better cyclical positions.

Peter Hobbs, managing director and head of real estate research at MSCI, said:

“Although the dataset provides powerful information on real estate performance and risk, it also contains important insights into the asset management process.  Asset managers face greater pressure to contain costs while still delivering outperformance in a low yield environment.  IPD Global Intel data imply wide differences in improvement expenditures across markets.  At a global level, improvement expenditures as a share of capital value averaged 1.15 per cent over the past decade.  Improvement ratios exceeded two per cent in Sweden over the past five years, and approached the two per cent threshold in the US, Canada, the Netherlands, and South Africa over the same period.”