Fiscal cliff overshadows revival in US property

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The prevailing climate of low interest rates is pushing institutional investors increasingly towards real assets and the property sector is a key target.

But while the US housing market draws closer to recovery, leading global real estate investor Gerios Rovers of Cohen & Steers, says the US fiscal cliff casts a dark shadow over any potential revival.

The CIO and managing director of the group’s European office runs both global and European real estate securities portfolios for a number of large retail and institutional investors, including Nordea.

The Brussels-based property specialist says positive signs are coming out of the US market but indecision over its fiscal future is clouding matters.

‘The housing market in the US has been under severe pressure for the last four to six years but is slowly showing signs of bottoming and that is very important,’ says Rovers.

The US apartment sector is a good early indicator of any upturn, says Rovers, as when the housing market has been under pressure this sector has done very well.

But since the beginning of this year the apartment market has been slowing down while the housing market has been picking up. ‘What we are seeing in the apartment sector is that cashflow growth for this year, as well as for next, is still very robust.

‘It is too early to say whether we are completely out of the woods because key challenges remain for the US, the most important of which is the fiscal cliff.’

The uncertainty this issue creates is hampering the overall economy and is having a knock-on effect on any potential pick-up in the housing market. ‘First and foremost it is creating uncertainty for US corporates, and if they are unsure of their country’s future they won’t invest.’

‘And if they are not investing, they are hoarding cash rather than hiring people.

‘It is crucial that this issue is resolved. As soon as there’s some clarity it will favour the housing market.’

Time to back cheap offices

For Rovers, some of the most interesting investment opportunities at the moment can be found in the office sector.

An inherently cyclical market, every so often it will offer great opportunities through relative value plays and that time has come, he says. ‘We all know what the credit crunch has done to financial services and to office values. In certain markets like the UK and the US access has been pared down about 30 to 40%.

‘But you have to make sure you are in a supply-constrained market.’

His main targets are currently core global markets where there has been a lack of construction and prices are bottoming out.

‘We definitely see that in selected markets in the US as well as in Europe. For example, we are very optimistic about the West End in central London but also see opportunities in the City.

‘On the continent it is a little bit more challenging because we don’t see that supply constraint we need and growth is very slow.’

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Rovers also warns investors must differentiate between the listed and non-listed real estate markets as they do not offer the same value opportunities.

‘In the listed sector people may anticipate a recovery in the office market that has been very hard hit in the last couple of years.

‘While if you look at the unlisted market it is still very difficult to figure out where asset valuations have bottomed because pricing mechanisms are completely different and typically lag what you see in equity markets.

‘From that perspective we believe current pricing is reflecting the underlying fundamentals more clearly than in the non-listed sector.’

Low growth

The main challenge global property investors have to face, says Rovers, is anticipating future growth levels.

Economic growth prospects remain uncertain and have been hindering his investment strategy. While Asia still shows signs of healthy growth, the US is growing at a slower rate and Europe is even more of a challenge.

‘If Europe and the US can get their act together in the coming year it will become a really bright spot because you get a combination of supply constraint and some growth coming through.

Factfile: Cohen & Steers

Cohen & Steers is a global investment manager focused on speciality asset classes, including real estate securities, listed infrastructure, real assets, preferred securities, large-cap value equities and alternative strategies. It currently has close to $45 billion in assets under management.

This article originally appeared in the December 2012 edition of Citywire Global magazine.