Global real estate waded out of the murky economic waters of 2023 to close the year in positive territory thanks to sharply falling bond yields from November onwards.
According to data provided by UBS, the sector returned 9.8% throughout the year, as bond prices on 10-year US Treasuries surged, leading to a recovery (or the anticipation of) in funding and transactional activity.
‘Specialty’ real estate and hotels were the true winners, with asset values surging over 20% each, while office and diversified properties came bottom of the table.
Regionally speaking, Japan and Germany outperformed, with real estate investment trusts (REITs) outperforming non-REIT investments by more than two to one.
Though real estate was particularly exposed to the tidal wave of interest rates over the past two years, UBS noted that the sector has a propensity to rally up to 24 weeks before the first estimated central bank rate reduction, “with the rally historically continuing until the actual rate cut”.
Does this make real estate relatively cheap right now, despite the late-2023 recovery?
Global real estate is currently valued at a price-to-earnings ratio (PE) of 15.9 compared to the 10-year average of 16.9.
So yes, real estate prices have yet to recover to historical averages, though it may take further yield compression to achieve a fairer valuation.
UBS made the case that European and UK real estate stocks are cheaper that others right now, though the bank’s top picks span the gamut of jurisdictions.
They include:
- CapitaLand Ascendas REIT and Frasers Centrepoint Trust in Singapore
- Sino Land in Hong Kong, COLI, Longfor, CR Land and KE Holdings in China
- Mitsui Fudosan and Nippon Prologis in Japan
- Goodman, GPT, Dexus and Ingenia in Australia
- Aedifica, Merlin and Shurgard in Europe and
- Sun Communities, Extra Space, Prologis and Equity Residential in the US