5. Investment calls
Morgan Stanley (MS) offers three big listed property calls:
- Logistics: “We are bullish on logistics property, and we see Segro as an attractive play on that theme.” says MS, adding that return profiles for big-box warehouses and last-mile distribution assets will further delineate in 2019. MS says increased security and visibility of big-box income justifies yield compression, but do not expect rental growth. By comparison, rental growth is likely for last-mile and urban assets for which land scarcity limits supply. “OK to own urban assets, but big box to become a developer market. As such, we think equity markets will no longer reward models that buy and hold ‘dry’ big-box assets.”
- German residential: While yields are getting low, MS sees several drivers for continued capital growth: annual rental growth in the region of 1-3% is achievable; resources available among listed universe for capital expenditure to modernise portfolios; significant government stimulus from which could amount to €3.3bn during this coalition’s 4-year term. This home-ownership programme is more attractive than the UK’s ‘Help to Buy’, as it is a grant and it relates to all property purchases (not just to newbuilds). In addition, Germany’s housing demand still significantly outstrips availability and supply, while there are no signs of household mortgage debt issues.
- Spain: “We are convinced the outlook for a material part of Spanish property remains compelling.” Office rents are rising while vacancy has been failing and consumer spending is rebounding, says MS, adding: “Most importantly, yields have compressed materially… Spain is still early in the expansionary phase for Spain, a country that tends to experience long economic cycles.” However, to temper slightly, it must be remembered that GDP growth has been moderating while the rising return requirement for US capital – integral to the real estate sector’s revival – offers cause for reflection. MS’ top listed stock pick is Merlin Properties. “We also like any name with exposure to redevelopment and refurbishment expertise. A key opportunity in Madrid and Barcelona offices is to reposition and redevelop undercapexed outdated offices.”
- London residential: international investors are expected to step up investment in inner London, driven by an optimistic rental growth outlook, longer-term capital appreciation and a weaker pound. The significant demand supply imbalance across inner London is “caused by the challenges in obtaining planning consents, together with developers finding it difficult to commit to new construction starts due to the uncertainty caused by Brexit,” explains Ashley Osborne, head of UK residential at Colliers International.
- Investor interest in alternatives continues to grow. According to PwC’s Emerging Trends 2019, investor exposure is highest is highest in hotels, student housing and flexible offices while student housing tops the wish-list for the year ahead. “Alternatives are supported by strong demographics, and they are seen as part of the industry’s structural change towards operational assets and property as a service,” says PwC. Investors, developers and operators are also looking at less established markets, such as retirement living or hybrids like coliving where existing management skills can be easily transferred. “The scope for consolidation and acquiring sizeable market share will make these markets attractive not just to operators from other sectors, but also new entrants to the market from overseas,” says JLL.