Brighter than expected, but cloudy in patches by Nuveen

LAGOS (Capital Markets in Africa) – During the Cold War, a group of atomic scientists began publishing the Doomsday Clock, a representation of how far away the world was from man-made destruction. It was originally set at seven minutes to midnight but has since been readjusted to between 17 and two minutes to, without quite ticking on to Armageddon.

More than a decade since the global financial crisis, real estate investors are rather like the atomic scientists, moving their counter ever-closer to the top of the market, only to ratchet it back once more. In 2018, there was something of a consensus that the end was nigh for the current cycle, and the Urban Land Institute’s Emerging Trends in Real Estate Asia-Pacific 2019 report was subtitled ‘Calling the top?’

However, one of the most significant causes of concern in late 2018, the prospect of interest rate rises, appears to have dissipated for now. After raising rates steadily last year, the US Federal Reserve Bank cut its rates for the third time in 2019 in October. In Asia meanwhile, Australia cut interest rates twice in 2019, while Indonesia, Malaysia, and the Philippines have joined the rate cut trend. The People’s Bank of China, which had kept interest rates static since 2015 and in November, cut the one-year rate at which it lends to banks through its medium-term lending facility from 3.30 percent to 3.25 percent.

This change in the interest rate environment has increased how optimistic Asia-Pacific investors are feeling about the region, according to the participants this year’s annual PERE roundtable held in Hong Kong.

Louise Kavanagh, managing director at London-based manager Nuveen Real Estate, says: “I think we are in an elongated cycle. At the beginning of this year, I would have said we are at a late stage in the cycle. But now, given where monetary policy is, it has elongated the cycle.”

Kavanagh also points to real estate’s relative value for investors allocating capital across asset classes. “It is tougher to achieve risk-adjusted returns and to find investments, but, fundamentally, real estate still makes sense in terms of relative value: equities are volatile and bonds low-yielding. So, we are still seeing capital looking at real estate for stability and income.”

There is also confidence that Asia-Pacific offers a relatively strong proposition compared with North America and Europe. Kevin Colket, founder and chief executive of Hong Kong-headquartered Global Hospitality Investment Group, a private equity real estate firm launched this year and specializing in hospitality, says: “Across the world, it hasn’t been hard for anyone to make money over the last 10 years, especially in the US and Europe, whereas it has been more difficult in Asia-Pacific because the markets are less homogenous here. However, achieving solid risk-adjusted returns will become increasingly difficult in the US and Europe given where we are in the cycle, and Asia is starting to look increasingly attractive given its leading long-term demand growth fundamentals.”

Please read the complete article at Brighter than expected, but cloudy in patches.