February 27, 2013

U.S. Real Estate Looking Up but Emerging Markets Rising Even Higher: Cohen & Steers

Total returns for emerging-market real estate were 42.1% in 2012 vs. 18.1% for U.S. real estate

Step aside, American property owners, and make way for Chinese and Brazilian real estate.

Even though the latest data on U.S. housing now reflects an improved real estate market here in the States, countries such as Brazil and China are easily dwarfing that fledgling growth due to the economic and demographic realities of the emerging markets, analysts with real estate fund management firm Cohen & Steers reported Tuesday at a press briefing in New York.

For example, said Jason Yablon, a portfolio manager for the Cohen & Steers Emerging Markets Real Estate Fund (A Shares: APFAX), growth in China is being driven by rapid urbanization as rural populations migrate to cities in search of work and pressure the government to invest in infrastructure-related sectors such as housing.

Total returns for emerging markets real estate were 42.1% in 2012, according to the FTSE EPRA/NAREIT Emerging Real Estate Index, versus 18.1% in the United States, according to the FTSE NAREIT Equity REIT Index.

 “The consumer element is driving the emerging markets story,” Yablon said. “As China rebounds, large parts of Asia will benefit, and it’s helping the entire region."

Further, Yablon pointed to an emerging-market trend toward securitization of real estate, which helped produce strong returns in 2012.

“Emerging markets not only make up a larger percentage of global GDP than just a few years ago, but they have grown faster than developed markets,” Yablon wrote in a real estate securities note. “This is a trend that we expect to continue into the future, partially because they are less leveraged than developed markets. They also tend to have stronger balance sheets marked by lower debt/GDP ratios.”

Meanwhile, housing data so far in 2013 signals that the U.S. real estate market also is looking up. On Tuesday, an S&P/Case-Shiller home price index release showed that U.S. home prices rose in December, up 0.2% in 20 cities, while the Commerce Department reported that U.S. new home sales jumped nearly 16% in January, to their highest level since July 2008, “a sign that the housing recovery is accelerating,” The Associated Press reported. On Wednesday, the National Association of Realtors said that its pending home sales index rose 4.5% to 195.9, its highest level since April 2010.

“The single-family market is beginning to have an impact on the U.S. real estate market,” Yablon said Tuesday.

He pointed to both positives and negatives, but overall, he said Cohen & Steers believed in the U.S. real estate market’s fundamental recovery. The big winners are the industrial and self-storage subsectors, which are benefiting from economic and jobs growth, while the losers are health care, defense and generic office in Washington, D.C., as the federal government struggles with budget woes.

Three-year total returns are 12.11% as of Tuesday for APFAX, which is one of the only emerging markets real estate funds in the United States. Total assets for the six-year-old fund are $44.8 million, expense ratio is 1.80% and load is 4.50. That compares with three-year total returns of 17.56% for Cohen & Steers Realty Shares (CSRSX), the firm’s 21-year-old flagship fund that focuses solely on U.S. real estate. Total assets are $4.9 billion, expense ratio is 0.96% and there is no load.

Read REITs Outperform S&P 500 for Fourth Straight Year at AdvisorOne.

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