US property returns forecast to fall

Despite institutional investors predicting that returns for property will fall over the next two years, high-quality, core US real estate remains an attractive investment opportunity, says Greg MacKinnon, the head of research at the Public Real Estate Association.

In its latest fourth-quarter Consensus Forecast, the not-for-profit research organisation says a survey of members reveals investors predict that returns will fall from the strong result this year.

Despite the downward revisions in forecasts, MacKinnon says that this does not indicate a reversal in the market.

Long-term average total returns for the US market have been in the range of 9 per cent a year.

Investors’ average five-year forecasts were in line with this average, and MacKinnon notes that the lower volatility, ongoing yields and returns compared to other asset classes still make a compelling case for property.

Sponsored Content

The average forecast of returns in 2012 for the National Council of Real Estate Investment Fiduciaries’ (NCREIF) Property Index was 7.0 per cent, which is down from the predicted total return for 2011 of 12.4.

Investors expect much of this fall in total return to come from decreasing rates of capital appreciation, with income predicted to remain stable in 2012.

“The forecast for next year are slightly below average compared to the long-term average; in large part this dip in forecast for returns has been due to the surprisingly strong returns through 2011,” MacKinnon says.

“At the beginning of this year and the end of last year people were looking for a recovery of values in 2012. Having gone through 2011 it seems that the recovery has come earlier than expected. So, in a sense the return that was expected in 2012 has come earlier.”

The NCREIF Property Index covers institutionally-held properties which are predominately high-quality, core real estate.

MacKinnon says that in early 2010 and early 2011 there has been a “flight to safety” in property, with institutional investors showing the greatest interest in high quality assets.

“Most of the research has found that the demand in 2010 and early this year was in the six major US markets comprising of New York, Washington DC, Boston, Chicago, San Francisco and Los Angeles,” he says.

“Through 2010 and spring 2011 there was enormous demand for this high-quality core property.”

While MacKinnon says that prices for top quality assets in these markets are approaching previous boom levels, the broadening out of a recovery in secondary markets in the US has stalled due to concerns about the US economy and the crisis in the Euro zone.

“Investors are putting their hands up and saying, ‘Let’s wait and see what happens in the broader economy before we go slightly up the risk spectrum’,” he says.

The survey of a subset of 22 its members included large investors such as TIAA-CREF, Morgan Stanley Real Estate Investors, Russell Investment Group, BlackRock and Aberdeen Asset Management.

The investors, on average, predicted that income returns for all property types would hover at around 6 per cent. Capital growth was forecast to fall to 1.8 per cent in 2012, from 6.1 per cent in 2011, before recovering to 2.2 per cent in 2013. US property was forecast to achieve average capital growth of 2.9 per cent a year between 2011 and 2015.

The most bullish outlook was for the US apartment market, with investors predicting an average total return of 14.1 per cent in 2011, dropping to 9 per cent in 2012.

In 2013 this was predicted to fall further, to 8.5 per cent, but over the five years to 2015 was predicted to achieve a total annual return (including income) of 9.7 per cent.

“The fundamentals in apartments have been quite strong partially due to the blow-up in the single family residential housing market in the US,” MacKinnon says.

Beyond strong demand for rental properties, support for the apartment market comes from buyers’ greater capacity to attain finance. Unlike the housing market, the apartment market didn’t experience the same over-building in boom times.

“Now we have a lot of demand and the supply is only starting to catch up, so going forward the demographics look good, as do the supply and demand issues look good, and it has a lot of fundamentals that point to this market getting its wind back,” MacKinnon says.

The greatest fall in sentiment for returns was seen in the office and retail segment of the US property market.

The average forecasts for returns in 2011 for office property were 12.6 per cent, and for retail property was 11.7. These were expected to fall to 7.1 per cent and 7.9 per cent, respectively, in 2012.

Leave a Comment

Sort content by

CFA to lead industry out of crisis

Protecting the pension system is one of six key themes at the centre of the CFA Institute’s Future of Finance initiative as it aims to empower the investment industry to take leadership in restoring trust. Speaking at the sixty-sixth annual CFA Institute conference in Singapore this week, president and chief executive of the CFA Institute,

Tail risk parity, V 1.0

Just when you thought you were safe, the next reiteration of risk parity has arrived. AllianceBernstein’s tail risk parity takes the concept of risk parity, reallocating assets uniformly according to risk, but it uses tail risk, not volatility, as the core measure. The concept of risk parity is a portfolio diversified according to risk, rather

Retirement: a cause worth working on

There are two things that drive the newly appointed global chief operating officer of State Street Global Advisors, Greg Ehret, in his bid to improve the client experience: the retirement business is a cause worth working on and the clients are the reason the business exists. Ehret was appointed to the new position at SSgA,

Pension funds, where banks no longer go?

There continues to be potential for pension capital appearing where bank lending no longer wants to go. Commentators in the UK and continental Europe have heightened expectations that pension funds will step in to help fill the continent’s bank financing gap. Societe Generale, for instance, recently predicted further “disintermediation” by investors sidestepping banks and looking

Building consensus for investment beliefs at CalPERS

An investment-beliefs workshop for the CalPERS board, held in April, revealed five areas, including active management, where the views of the board and staff lacked consensus. The contentious, or unsettled, topics for discussion were active management, private asset classes, sustainability (environmental, social and governance), investment performance targets and stakeholder considerations. At the board workshop, Janine

Behind PGGM’s ESG index

In 2010 PGGM conducted a study to see if it was possible to reduce the number of companies it invested in from 4000 to 400, based on its environmental, social and governance leanings, and still maintain it’s beta risk/return profile. The idea was that the €133-billion ($174-billion) fund would better know and understand what it

Previous