A week is a long time in politics, and it can feel longer during the political Punch and Judy show that is the week before the election. But just as the volatility of political sentiment can be startling, so can changes in the performance of global real estate.
Europe, a former laggard, was the key improving component of global property returns, yielding 15.6% at the asset level in 2014, and over the course of the past 12 months has taken a clear lead in the global property market. In our latest global property fund analysis, we saw a total return of 11.9% across the world as a whole to the end of 2014, so Europe is comfortably ahead of this figure.
The speed of the turnaround in the European market over the past 18 months has been striking. The lower returns in the UK and the declining nature of certain Continental European markets during 2012-13 meant that, as an aggregate, returns were close to zero over much of this time. Since then, a surge in the UK and more recently in other European markets means that the IPD Global Property Fund Index significantly outperformed the global average in 2014. This is particularly noteworthy in a period when the break-up of the euro has never been far from the front pages and the in-trays of central banks.
The relatively high leverage of the pan-European funds coupled with weak property-level returns depressed fund-level performance between 2011 and 2013, but as the direct market has improved, these higher levels of leverage have started to boost returns. Pan-European funds recorded a net fund return of 13.7% in 2014, which is close to the 15.9% achieved by UK funds and well ahead of the US funds, which returned 11.7%.
However – and there is always a “however” – it is not fair to say that North America is underperforming. Both the US and Asia Pacific are experiencing market stability and it could be argued that they are both comfortably in cruise control, rather than having a foot pressed firmly on the gas.
US-dollar investors in their domestic market will be reasonably happy with the performance of their assets over the past 12 months, but the same cannot be said for those who have chosen to invest their bucks on foreign shores.
The strong appreciation of the US dollar against the euro and most Asian currencies has impacted negatively on dollar-based investors. American investors who would have invested in Europe would have benefited from strong European property returns expressed in local currency but would have incurred a currency loss when converting the returns into US dollars.
Among the improving trends reported in the IPD Global Property Fund Index, there continues to be significant variation in performance across the major regions, across portfolios and between different property types.
Despite differences across the world, one key characteristic that the entire globe has in common is the strength of the industrial market. Whether in the principal European logistics area of Le Havre to Hamburg, the Chicago region of the US, or the Kwinana industrial area of Western Australia, the sector is thriving. Overall, industrial properties returned 14.9% in 2014 – the highest total performance across property types in each of the three main regions.
In comparison, retail returned 10.4% and underperformed throughout EMEA, Asia Pacific and North America, showing itself to be a sector that is being challenged by the structural changes that it has faced in recent years.
With the election looming, there is going to be a period of uncertainty on the horizon in the UK as coalitions are formed and policies are horse-traded. The same brinkmanship seems likely in Europe as the potential “Grexit” threatens to cause ripples, if not waves, in economies worldwide. However, with investment inflows into real estate ever-increasing, returns rising and yields tightening, there is no sign that current investor appetite will diminish any time soon.
Phil Tily is executive director of MSCI
