The year continues to be hurting for Investors and recent attempts of a market recovery have been unsuccessful. After a mild rebound, world financial markets are again close to their year’s worst levels, said Kamran Butt, Managing Director, Head of Advisory SEDCO Capital.
In addition, the Bank of Japan’s move to negative interest rates has been interpreted as a signal that the global interest rate structure is moving lower again. So it comes as no surprise that at the time of writing, gold is the best performing investment YTD, up nearly 10%, he pointed out. The so-called “safe haven” assets are back in appeal. And on the backdrop of a low interest rate environment the search for yield is in ‘vogue’.
One particular asset class we believe is appropriate is that of real estate.
Real estate has a number of attractive characteristics for investors. This includes the diversification benefit due to low correlation with other asset categories, relatively high and stable cash flow returns.
This means that by adding real estate to an existing portfolio of equities and bonds, investors can gain diversification benefits. Therefore similar portfolio returns can be generated with a lower risk, or higher returns can be generated with the same risk. Although investors have long realized the opportunities of real estate investments, many restrict themselves to their home markets. In many portfolios, exposure to foreign real estate is just a small part of the total investment volume.
This is mainly because markets vary greatly from country to country and investors often know their own market best. However by investing in international markets, investors can not only benefit from developments outside their own countries, but also diversify their portfolio and improve the risk-return profile.
We also view that the investment style, is also a key decision for real estate investments. Depending on their risk/return profile, real estate and indirect investment vehicles can be divided into core, core plus, value-added, and opportunistic. Because most real estate investors’ focus is on stable income returns, hence, it is recommended to implement most of the real estate allocation using core and core plus strategies. In this context, we would advise investors to use the “core satellite” investment approach. Most of the investments are made in core strategies, but a small portion of the investment aims to generate higher returns using value-added or opportunistic strategies. The potential success of value-added strategies depends on the market cycle. The ideal conditions are offered by markets in which higher rates of vacancy prevail, but there are expectations to drop over the investment horizon, while real estate values may rise due to higher rents. In particular, various European markets such as Spain, Poland, or British regional cities, and some US markets are currently attractive for using value-added strategies.
In Saudi Arabia the demand for quality income generating properties remains abundant; this has been led by a lack of suitable supply across most asset classes which, together with strong domestic demand, have driven rental inflation in most areas. The retail sector has been the best performing sector during the past few years, with retail brands battling for quality space. The residential market remains stagnant as a result of the pending land tax law which is causing buyers to wait and see how that will affect land values.
Across the GCC however and in particular the UAE, there remains caution as investment sentiment is wary of the lower liquidity levels in the markets by lower oil prices. Nevertheless, whilst there has been a substantial amount of equity move from the Middle East into more mature real estate environments (such as the USA and UK), demand for institutional quality assets across key GCC cities continues to grow as yields remain much higher in the context of other global cities.
Therefore, very fragile sentiment coupled with extreme risk aversion are weighing very hard on traditional liquid asset classes. Thus, high quality real estate investments are receiving a new level of attention from investors. We would advise those searching for income yield from real estate to look at liquid transparent markets with focus on capital preservation and income distribution. In addition to further focus on those markets that have a pronounced supply/demand imbalance.
* The writer is Managing Director, Head of Advisory, SEDCO Capital
