Valuations in the UK’s commercial property market continue to look “stretched”, warned the Bank of England in its last “financial stability report”, published in June. Prices in the sector are “vulnerable to a repricing, whether through an increase in long-term interest rates or adjustment of growth expectations, or both”. Although this doesn’t mean you should immediately sell all your holdings in the sector, now is a good time to make sure that your property investments are sufficiently diversified into other markets.
Over the year to the end of June, the amount of money invested in global property went up by 4% to $1.5trn (including money invested into land development), according to real-estate consultants Cushman & Wakefield. Investment demand “fuelled by yield has clearly remained strong”, and while interest rates and foreign-exchange trends have grown more uncertain, equity and debt remain readily available for the “right assets”.
In fact, sentiment in the real-estate sector remains “generally upbeat” in the majority of markets, according to the latest Global Commercial Property Monitor from the Royal Institution of Chartered Surveyors. Both the Occupier Sentiment index and Investment Sentiment index, (which measure “overall market momentum”), were positive in 23 of the 32 countries tracked. For the year to the end of June 2018, Cushman & Wakefield forecasts total investment growth of 4%-6%.
For the sixth consecutive year, New York was the most sought-after market in the world, while London saw transaction volumes fall by 25%, according to Cushman & Wakefield’s Global Capital Markets report. Overall, six US cities ranked within the top-ten most popular cities for investment in the year to the end of June. The Asian market continued to see the largest growth, with a 25% increase in investment on last year. And based on RICS’s data, Sydney “takes the top spot for capital value expectations”.
One low-cost way to invest in a basket of global property companies is to buy an exchange-traded fund (ETF). The iShares Developed Market Property Yield UCITS ETF (LSE: IWDP) tracks the performance of an index made up of listed real-estate companies and real estate investment trusts (Reits) from developed countries. Broadly fitting in with what appear to be the most promising markets, the iShares ETF’s largest allocation by far is to the US, which makes up 55% of the portfolio, followed by Hong Kong with 9%, and then Japan and Australia with 6% each. The UK makes up just 5% of the portfolio.
Sector-wise, roughly a quarter of the fund is invested in industrial and office Reits, another quarter in retail Reits, and then between 12% and 16% in each of real estate holding and development companies, residential Reits and specialty Reits (these are trusts that invest in non-standard real estate, such as cinemas and outdoor advertising sites).
Top holdings include the Simon Property Group, the largest shopping centre operation in the US, UK-based logistics and industrial building provider Prologis, and US self-storage company Public Storage. As of the end of September, IWDP had returned 7% over three years, the same as its benchmark index. The fund’s total expense ratio (TER) is 0.6%.
Other, slightly cheaper, ETFs that will track similar indices include the S&P Dow Jones Global Real Estate UCITS ETF (LSE: GLRE) and the HSBC FTSE EPRA/NAREIT Developed UCITS ETF (LSE: HPRD). The S&P Dow Jones ETF has returned 5.3% (relative to 5.6% for the index) over three years and has a TER of 0.4%. The HSBC ETF also charges 0.4% and has returned 3.7% over three years, matching its index.