Real estate is the oldest asset class in the world, dating back to the days when Ug the caveman waved a club and told his friends: “This cave mine.” The warm feeling people like Ug felt from having a roof over their heads gave birth to the 16th century phrase “an Englishman’s home is his castle”. In the 18th century, French philosopher Voltaire said: “The spirit of property doubles a man’s strength.”
It’s too bad misplaced faith in bricks and mortar has occasionally triggered a slump as a result of investors gearing up to buy property at the wrong time.
The US subprime crisis of 2008, which led to the broader credit crisis, resulted from salesmen persuading people to borrow money they could not afford to buy their dream home. Bank balance sheets were stuffed with bad property loans.
The market stagnated for five years. But it will take more than this to keep the sector down. In fact, enduring faith in it should help it capture more than a fair share of the liquidity being pumped into the global economy by governments and central banks desperate to engineer a recovery. If you have been waiting for the right moment to reinvest in property, this is probably it.
Sentiment has already been boosted by real estate purchases by cross-border institutions, including state pension schemes and sovereign wealth funds. Family office allocations have hit a record high.
Property yields look cheap compared to corporate bonds. “The spread would suggest that asset-value growth could hit 10% in the coming year,” says securities house Morgan Stanley. Banks are starting to tip toe back into the lending game. Insurers, hedge funds and asset managers are putting together loans. Good customers can now pay an interest rate of 5% on loans equivalent to 50% of the value of underlying properties.
Overseas buying interest is centred on prime property, yielding 4% or so. But this is encouraging domestic institutions to fish in secondary markets yielding 6%. This, in turn, is starting to fuel purchases lower down the market, where valuations are often lower than total rents set to be collected on unexpired leases, which implies site values of less than zero.
The prospect of easy change of use from offices to residential space adds spice. Property auctions are getting active, with Ireland the current focus of interest.
Property shares look expensive after rising 20% over 2012, in anticipation of market recovery. But Investec Securities thinks British Land and Segro are worth a look, adding that second-liners like Hansteen and Safeland are sufficiently agile to squeeze surpluses out of a recovering market.