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Why it’s time to look again at real estate

George Gay
George Gay
Portfolio Manager

With August’s 0.25% cut from the Bank of England, we have moved past peak rates for this cycle. As a leveraged asset class, real estate enjoys a tailwind from falling rates. So, what is in store from here and what should investors consider when reassessing the merits of property allocations in their portfolios?

Rates down, real estate up?

Analysis of the last four rising cycles suggests that there is scope for real estate equities to outperform relative to the wider market as borrowing costs begin to tick downwards. The chart shows this potential with real estate equities outperforming broader equities by an average of 8% in the 12 months following the last rate rise.

Performance of real estate equities vs. global equities - after the last four cyclical peaks in interest rates
Performance of real estate

Source: Columbia Threadneedle Investments

Well positioned even if rates remain elevated

We see little likelihood of interest rates returning to their post GFC lows. More likely is a return to longer run average levels against a backdrop of moderate inflation. But what if we witness a resurgence of inflationary pressure – would this place property business models under strain? Within our portfolio we are selective about the sort of businesses we invest in. We look for quality companies operating in sectors and locations characterised by supportive supply/demand dynamics. Management teams are crucial – the right expertise, approach, and alignment of interest are all vital components. Our listed real estate exposure has an average loan to valuation of around 33% and with debt costs capped/fixed to 2026, their immediate prospects are not dependent on the broader direction of rates.

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Mind the gap – a buying opportunity!

We have seen a welcome recovery in real estate equity values from their lows of 2023 but in broad terms, there remains a dislocation between share valuations and the true value of underlying property assets. In our view, this is a timely juncture for upping weightings to real estate. But as active investors we would always argue against doing so through a broad-brush allocation – not all real estate is created equal, so selectivity is key.

Once in a decade value proposition? European listed real estate materially underperformed wider equities
Real estate

Source: Columbia Threadneedle Investments

Near term, large discounts between share prices and underlying asset valuations certainly offer scope for a capital value kicker. Longer-term however, it is income streams that will be the key driver and seeking out pockets of potential rental growth is our primary focus. In key markets we see little oversupply – a function of a range of factors not least a non-existent development cycle 2008-14 post the Global Financial Crisis (GFC) and a covid-deferred cycle 2020-21. Where supply of new space is limited, and where tenant demand is stable, strong incumbent firms look well placed. We see a positive outlook for sectors including logistics, data centres, hotels,  prime retail in cities with high tourist footfall and even prime office markets in key central business district (CBD) areas such as London’s West End and core central Paris.

Industry shift endorses our hybrid approach

By investing in a blend of listed and physical real estate the CT Property Growth & Income Fund can tap into the best of both worlds and adopt a more active and flexible approach.

Flexible property investing with minimal cash drag
flexible property investing

And being flexible is exactly what we have been doing in the last 18 months. Since January 2023 we have tactically sold seven physical assets for £53 million and reinvested proceeds into listed European real estate securities – a move that, we believe, positions the portfolio well to take advantage of pricing differentials between the two markets.

cash

Source: Columbia Threadneedle Investments. Data as at 10.06.24

How are we targeting relative value?

We launched our hybrid strategy in 2005 – a structure and approach designed to counter the challenges faced when seeking to offer open-ended, daily dealing access to commercial property.  In subsequent years we’ve seen the merits of doing this – and, during liquidity events, the pitfalls associated with more traditional daily dealing (liquid) funds that invest purely in physical property (illiquid assets). The broader industry has belatedly responded. Alongside some high-profile fund closures, a growing number of vehicles are transitioning to a blend of physical property and real estate equities. We view this evolution as an endorsement of the approach we implemented almost 20 years ago, and it will be interesting to see how successfully (and quickly) they adapt.  For investors considering increasing real estate weightings against a backdrop of falling rates, we would make the case for a hybrid approach that has a long track record of success. 

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Why it’s time to look again at real estate

Important information

© 2024 Columbia Threadneedle Investments

For professional investors. For marketing purposes. Your capital is at risk. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. Not all services, products and strategies are offered by all entities of the group. Awards or ratings may not apply to all entities of the group.

This material should not be considered as an offer, solicitation, advice, or an investment recommendation. This communication is valid at the date of publication and may be subject to change without notice. Information from external sources is considered reliable but there is no guarantee as to its accuracy or completeness. Actual investment parameters are agreed and set out in the prospectus or formal investment management agreement.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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Important information

© 2024 Columbia Threadneedle Investments

For professional investors. For marketing purposes. Your capital is at risk. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. Not all services, products and strategies are offered by all entities of the group. Awards or ratings may not apply to all entities of the group.

This material should not be considered as an offer, solicitation, advice, or an investment recommendation. This communication is valid at the date of publication and may be subject to change without notice. Information from external sources is considered reliable but there is no guarantee as to its accuracy or completeness. Actual investment parameters are agreed and set out in the prospectus or formal investment management agreement.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

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