Tim Humphreys
Tim Humphreys said “Next year is shaping up to be an interesting time for financial markets as the post-Global Financial Crisis bull market faces a key test: dealing with the US Federal Reserve’s rate decisions. Some people believe low short-term interest rates have been positive for financial markets and higher rates will therefore be negative. But markets are not this simple and as long-term investors we are more focused on the long-term borrowing cost and cost of capital.
“Much focus has been on the changes in the global oil market and the ‘lower for longer’ crude oil environment, but our view is that we are in a ‘lower for longer’ yield environment globally and despite an inevitable first rate hike, we think the Fed will be cautious not to go too far as the rest of the world is still weak. Our view is that the strong demand that we’ve experienced over the past decade for real assets that offer high and sustainable yields will continue in 2016.”
Key trends for 2016: direct real estate
AMP Capital Global Head of Property, Carmel Hourigan said: “Unlisted commercial property still provides a very compelling investment proposition, particularly in Australia. While cap rates continue to compress to historically low levels, Australian real estate remains relatively attractive compared to other global markets and asset classes and the income return alone is very compelling. Capital markets will continue to be the most significant driver of investment performance during the next 12 months. Demand (particularly from offshore investors) for high-quality Australian real estate is insatiable. The fall in the Australian dollar has only served to make Australian real estate more attractive. The big differentiator to the last cycle is the fact that it’s generally equity, not debt, driving pricing. However, high quality real estate is in limited supply and hence landmark’portfolio’ transactions are commanding a lot of interest with a lot of domestic players priced out of the race. With major institutional investors from Japan, China and Norway yet to put a toe in the water in Australia, we expect capital markets to remain deep for some time yet.
“Double-digit returns from unlisted core funds are likely to continue for a little longer but funds need to be positioned for the next downturn. We have been divesting non-core assets to ensure portfolios are defensively positioned both in terms of asset quality and location. Going into 2016, we have a strong bias to Sydney and Melbourne office, and high quality regional shopping centres.”
Key trends for 2016: listed real estate
AMP Capital Deputy Head of Global Listed Real Estate James Maydew said: “Europe is extremely attractive; it’s in the early phases of significant monetary stimulus. Hard assets with contractual income are well positioned to benefit from this and listed real estate fits that criteria. We see great opportunity in certain core German cities – due to strong urbanisation, immigration and net household formation – and Spanish office. We expect certain Spanish markets to have some of the fastest growing rents in the world over the next three years.
“M&A is also likely to ramp up in 2016 globally as US Fed rate hikes create volatility and dislocation in the markets. This will present companies with a strong balance sheet and cost of capital to acquire publicly listed real estate trading at discounts to the direct market, given the ongoing arbitrage between the private and public markets.
“Urbanisation and infrastructure spend in global, gateway cities is also a strong theme. Companies with assets or development expertise in markets positively impacted by this structural trend will continue to benefit in 2016 as rental values grind higher. London West End, Mid/Downtown Manhattan and Central wards of Tokyo are large beneficiaries of this momentum, and can be accessed via retail, office and residential depending on the city or infrastructure project. In Japan, there is also value in the lodging sector, given the country is preparing for the Olympics and the Rugby World Cup during the next four years and the government has an explicit target to increase international visitors.”