A few weeks ago, analysts over at Source Multi Asset Research published a research note highlighting the attractiveness of real estate investment trusts.
Source presented data which showed that year-to-date, real estate (the FTSE EPRA NAREIT index) has been the best performing global asset with a USD total return of 12.6%. Within the US the return is 16.5%, which beats equities, Treasuries, and credit.
But the argument for REITs as an asset class doesn’t stop at the beginning of this year. Indeed, Source analyzed nearly two decades of data and found that real estate had outperformed equities, Treasuries and high-yield since 2000 — almost 16 years of outperformance. The FTSE EPRA NAREIT has generated 2.5 times the return on stocks since 1990. Since 1990 real estate has produced a total return of 13% per annum versus 9.4% equities.
Still, the performance of REITs is dependent upon the performance of the asset class underlying the instrument. REITs will only outperform the wider equity market if real estate markets remain buoyant. With property values looking frothy in traditional real estate investment markets such as London, New York, and Hong Kong investors now seem to be taking a cautious approach to buying in the sector. Nearly a decade of ultralow interest rates has pushed up property values around the world as investors have charged into the asset class seeking high, and stable returns in an uncertain market.
Analysts over at Jefferies believe that there is one real estate market in Europe that is on the cusp of a renaissance after lacklustre returns from the sector for the past few years.
Time to buy German real estate?
A combination of wage growth, negative bund yields, dormant inflation and a booming current account surplus is priming the German real estate market for a demand boom according to Jefferies’ Germany Equity Strategists.
In comparison to other Western Europe real estate market, the German property market is starting from a much lower base, making the region attractive to outside investors. Further, as the country has missed out on the real estate boom taking place in other regions, the country has not been a rush to introduce measures to slow down property price growth. Another reason why the region’s is more attractive to outside investors.
Economic fundamentals are supportive of home price growth. Wages are growing faster than consumer prices and Germany is benefiting from the European Central Bank’s policy of keeping interest rates at, near or below zero.
Overall, Germany is a very attractive place to be looking for real estate at this current point in time:
“With the economy running a large current account surplus at the same time as real rates are negative should ensure that property prices are well bid. One further factor that ought to drive demand is that affordability is still good. Furthermore, the weak euro ought to mean that foreign demand for real estate is also high. Indeed on most straightforward measures of property price to income or rent, Germany comes out as inexpensive.” — Jefferies