Instead of predicting a decline in the global property securities asset class, which includes property stocks, real estate investment trusts (REITs) and other listed property investments around the world, many fund companies, financial planning firms and fund distributors remain pretty hopeful about prospects.
The fundamentals for global real estate markets remain healthy. The demand for office space in the major financial centers remains strong and retail rental income value continues to show steady growth.
Investor demand is also supported by long running demographic factors and the key attraction of property, its yield, remains intact. Indeed, demand for property investments worldwide has been rising in recent years as the global ageing populations turn their attention to steady, high-yielding investment vehicles.
Over the past three years, funds in property securities have generated returns in excess of 20% on average per year. European property equities funds are currently the best performers in the property funds category, with year-to-date returns of 14.43%, while global and Asian property funds are up 6.75% and 3.66% respectively for the year.
The recent correction has brought the share prices back in line with the sustainable trend and in some cases, offers a distinctly attractive buying opportunity. However, not everyone is bullish on the property securities sector. Yields from REITs are not as attractive as they used to be especially in today's rising interest rate scenario. The US interest rates have been rising and that makes US REITs less attractive. From 1990 to 2000, the average dividend yield of US REITs ranged from 7% to 8%. Currently, the range is from 4% to 5%.
However, with the growing securitization of properties, REITs have become an emerging asset class, which long-term investors can't ignore. REITs and property securities still have a role to play in some investor's portfolios, especially those seeking regular income.
Global property securities, along with commodities and hedge funds, are often touted as good portfolio diversifiers due to their historically low correlation with global equities. However, the recent market downturn seems to contradict that theory.
In markets such as the UK, where specialist property share investors account for only a small proportion of investors in property companies, short term volatility is likely to be greater. In markets like the US and Australia, where dedicated REIT investment funds make up around half of shareholders, volatility is noticeably lower. With more and more longer term investors entering into the REIT and property securities arena that could help to create a 'calming effect on volatility' on this property asset class.
The European property securities still look the best in terms of potential upside. Most of the key property markets are likely to be active over the near term on the back of solid economic growth, with Asia again expected to be one of the fastest growing regions in the world.
Therefore, investors who are interested in property funds investment as part of a diversified portfolio should keep their exposure to less than 10%. They might be more volatile than other funds investing in developed markets.