Property equities: profiting from pockets of growth

15/03/2017

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​Guy Barnard, Manager of the Pan European Property Equities Strategy and Co-Head of Global Property Equities, comments on how the sector has been affected by the market rotation from growth to value stocks. He also discusses how the strategy is benefiting from this shift as the team is discovering more mispricing opportunities, and continuing to target countries, cities and sectors that offer attractive growth potential.

We spoke in November 2016 of markets being at a crossroads, with the investor mindset shifting from one dominated by income and growth, to one in which value and cyclicality prevailed. This rotation began in summer 2016 and accelerated following Donald Trump’s US presidential election victory. Against this backdrop, property equities have lagged wider equity markets, despite recovering in recent months.

Market rotation creating mispricing opportunities

As investors in property equities, we always try to balance our views on direct (physical) property markets with what is priced into shares. As a result, we may be overweight countries or sectors with relatively weak fundamentals if we think shares are pricing in too much negativity. Likewise, we are mindful of overpaying for growth. From our current standpoint, we are increasingly seeing opportunities to buy into growth stories at discounted prices, as the market rotation, in many cases, is overlooking strong real estate fundamentals. We used this mispricing opportunity to benefit our portfolios in recent months.

Targeting pockets of growth

Although the European political backdrop may create more volatility in equity markets this year, we continue to believe that property equities' offer of an attractive income yield with predictable growth characteristics should be able to deliver attractive returns to investors. Furthermore, while market-wide capital growth is likely to slow in 2017, there are pockets of growth that we can target at a country, sector or city level. As chart 1 highlights, not all markets and sectors across Europe move in sync with each other.

Chart 1: opportunities from divergence in rental growth outlook

Source: BofA Merrill Lynch Global Research, Jones Lang LaSalle (JLL) at January 2017.

Current favoured country/sectors include:

Spain – rental growth potential

Our largest country overweight through the second half of 2016 was to Spain. Political uncertainty had weighed on share prices, and appeared to be overlooking a strong economy, a real estate market seeing strong investor demand and the first signs of rental growth. Our focus on companies exposed to the Madrid and Barcelona office market has served the portfolio well, and while we have taken some profits we think there is still more upside in the year ahead.

Chart 2: Spanish offices poised for rental growth

Source: Morgan Stanley Research, Bloomberg, at August 2016. Trough-to-current, peak-to-trough rental values.
Stock picks: Inmobiliaria Colonial, Merlin Properties

Germany – residential landlords benefiting from demographic trends

German property stocks were among the weakest globally during the market rotation in the final quarters of 2016. This was particularly true for stocks exposed to the residential sector, which were seen as a key beneficiary of falling Bund yields. While valuations looked stretched in the summer, a circa 20% pullback in the shares, combined with underlying fundamentals strengthening further, gave a good opportunity to increase exposure to the sector in November/December. We expect residential landlords to continue to benefit from strong population growth in urban areas supporting the rental outlook (see chart 3). We are also still positive on the fundamentals in the commercial sector (office and industrial) and remain comfortable with our overweight here, particularly to the Berlin market.

Chart 3: growth in German urban populations to benefit listed landlords

Source: Destatis, ABN AMRO Equity Research
Stock picks: Deutsche Wohnen, ADO Properties, LEG Immobilien

UK – focus on structural growth

The UK property market proved far more resilient following the ‘Brexit’ result than expected by most. Although capital values fell by 3-4% between July and September, they have been rising steadily since. A weak sterling, lack of distressed sellers, and policy action taken by the Bank of England, have all supported the market. Although we expect further capital declines in certain parts of the market, notably London offices, driven by a weaker rental outlook, other sectors, such as industrial, look set for continued capital growth (chart 4).

While we see value in many UK property stocks today, which continue to be heavily discounted despite high quality assets and balance sheets, we remain cautious given ongoing ‘Brexit’ uncertainty. Instead, we continue to focus on areas of structural growth such as industrial, self-storage, student accommodation, and residential land outside London. This, coupled with some selected value names, we think, provides a well-balanced exposure to the market.

Chart 4: structural shift in industrial sector is beginning

Stock picks: SEGRO, Safestore Holdings

Summary

Although European assets and the property sector may be out of fashion with investors today, we think the stocks held in our concentrated portfolios still offer attractive prospects, either from a growth, value or income standpoint. With listed real estate stocks continuing to trade at a discount to net asset value (NAV), it remains cheaper for investors to buy property through shares than physical real estate. While growth is moderating, we still forecast circa 5% asset value growth this year, albeit with wide divergence by country and sector. More importantly, the income streams of the property sector remain incredibly robust, with the sector’s current dividend yield of almost 4% forecast to grow by 7% p.a. for the next two years.




Note: references made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its us.


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Please read the following important information regarding funds related to this article.

Janus Henderson Global Property Equities Fund

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Janus Henderson Horizon Pan European Property Equities Fund

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  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
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  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.
  • The Fund may invest in real estate investment trusts which can involve different risks to investing directly in the underlying assets. Such schemes may increase risk due to factors such as restrictions on withdrawals and less strict regulation. The value of your investment may fall as a result.

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