International real estate funds, particularly emerging-market portfolios, had a fantastic run in 2012, on the back of the diminishing threat of global inflation and improved prospects for global growth fueled by the domestic consumption dynamic in many emerging-market nations. And the run is continuing.
Even today, real estate is looking to be the best way to capture the upside of these consumer-driven economies around the world, according to Jason Yablon, vice president and portfolio manager at the investment management firm Cohen & Steers, whose emerging-markets real estate fund was up 40% in 2012.
“The continued securitization of real estate in many emerging-market countries is still in its early stages, and we really think real estate, compared to other sectors, is a much better way to play on the domestic consumption theme, particularly with economic fundamentals continuing to improve worldwide,” Yablon said. “Assuming that inflation doesn’t get out of hand this year, emerging-market real estate stocks have a chance to continue their outperformance.”
The stocks of real estate companies in many emerging-market countries are also attractive because unlike companies in the U.S., they are not highly levered, said Jeremy Schwartz, director of research at WisdomTree Investments. Stacking that up against current valuations, and factoring in PE ratios and cashflow, many real estate companies look good, he says, provided that investors can properly manage the currency risk that comes with investing in emerging markets.
The emerging-market world is also extremely fragmented when it comes to real estate stocks, and with different countries at different points in the economic cycle, investors will need to be extremely vigilant in making their choices this year, according to Yablon, “because in emerging market real estate, you can create a lot of value easily, but you can destroy it just as easily.”
The most important factor to consider in real estate is the progress countries have made in terms of securitization, Yablon said. In Mexico, for instance, REIT rules were only established in the past year and thus far, just four companies have come out with public issues, which means there’s a lot of potential going forward, he said.
From a price point, too, a country such as Mexico is far more attractive than China. While China is an obvious choice for both real estate and the overall consumption dynamic, it is actually too expensive for many investors. And as a result of recent news reports suggesting that overinvestment in China’s real estate sector may have created the largest bubble ever, the country is looking even less attractive to investors such as Michael McGowan, portfolio manager at Forward Management. The greater opportunities lie elsewhere in Southeast Asia, notably in countries such as Malaysia, the Philippines and Thailand, in both commercial and residential real estate, McGowan said.
“In both Malaysia and the Philippines, we see property companies that have invested in nice sites that are producing income and can build in the future, and because they have small market cap, we own a lot of names,” McGowan said. “Both countries also have programs to get people into houses, and on the commercial side, the cost of a square foot is low, particularly in the Philippines. From a macro standpoint, too, we like these countries because they have a younger population, stable politics and in the case of the Philippines, worker remittances from overseas help boost the sale of both condos as well as shopping centers.”
But it isn’t only emerging-market real estate that’s attractive right now. For Wilson Magee, portfolio manager at Franklin Templeton Real Asset Advisors, Europe also offers some good prospects, many of which are looking even better as the overall macro environment continues to improve. Companies such as Unibail-Rodamco, Europe’s leading commercial real estate developer, make for excellent investments and remained strong even at the height of the European crisis, he said.
“Unibail-Rodamco has reasonably strong sales and has managed its balance sheet very conservatively,” Magee said. “The company has also had tremendous access to debt capital in tough times. In fact, the last €750 million bond issue they did had a seven-year maturity and came with a coupon of 2.45%, which is pretty tight.”
To boot, Unibail’s Spanish portfolio is of top quality and has continued to perform well despite the continued slump in the Spanish real estate market, he said.