Ever since the outburst of the financial crisis, which led to a rapid erosion of property prices across the developed world, managers of property funds have had a hard time convincing people that the asset class was still a sound investment. But sentiment has shifted. Moreover, according to the latest EIE Fund Manager Sentiment Survey return expectations for the asset class are at a record high (see graph to the right).
Hunt for yield
The key to the revival of real estate securities probably lies in the demand for yield continuing unabated, while the stock of assets providing it at a reasonable level of risk has continued to fall. This is particularly evident within bond markets where many yields are at historic lows. This has provided fertile soil for fund houses to create new products, some of which are multi-asset funds with a property element, while others seek to invest solely in the property space but, seek to offer something different from a traditional property exposure.
Investing in expansion
According to Tim Cockerill, investment director at the Rowan Dartington, while the market is already well into the property revaluation cycle, the asset class still has some room to run and, he says, the firm is overweight the asset class in those portfolios that are exposed to property.
“Property returns tend to come in the later parts of the economic cycle, because in the earlier parts firms and individuals are reluctant to commit to invest in expansion. It is only when they fully buy into the recovery, that they start investing in property,” he said.
Fund managers are now more positive about property than about any other asset classes, even though return expectations for the Japanese and European equity markets also remain high, with the quantitative easing policies in place in both markets expected to provide reasonable upside to local equities. Meanwhile, sentiment regarding US small caps has tumbled into neutral territory, as the stronger dollar in combination with high valuations have made the asset class less attractive.