Real estate remains popular with investors. But investors should be careful: The odds are that the industry will face another downturn before too long.
That is the message from the latest Investment Strategy Annual report from LaSalle Investment Management.
According to the report, money will continue to flow into real estate from across the capital markets. But LaSalle warns investors that they should be increasingly concerned about getting caught late in the cycle. LaSalle says that investors should anticipate the next cyclical downturn in a few years.
The report says that real estate is a strong investment opportunity today. But there are plenty of areas of uncertainty, according to LaSalle. The company gives one example: Different regions of the world are growing at different speeds. Because of this, investors need to prepare their portfolios for a world where interest rates rise more quickly in some countries than in others.
To prepare for this uncertainty, LaSalle suggests that investors:
• Diversify their holdings across a number of countries that are in different stages of the capital market cycle.
• Anticipate different interest-rate environments by allocating to real estate assets with income streams that keep pace with rising inflation or debt costs in growing economies like the U.K or the United States. Investors should also focus on high-quality properties and locations in markets where growth and interest rates will stay “lower for longer,” places such as Japan or Western Europe.
• Invest in secular trends, rather than cyclical ones, that will be less exposed to a downturn. The report found that investments linked to demographics, technology and urbanization are likely to be the key in helping investors to identify such trends.
• Continue to place a high emphasis on sustainability factors, like energy efficiency and recycling, when buying, improving and operating buildings. Tenants and the capital markets will be paying much more attention to environmental standards in the years ahead.
Other themes for 2015 identified by the annual include:
• Money is likely to continue to flow into real estate as long as the yields on property continue to offer a premium to investment-grade bonds
• The debt markets are also embracing real estate, although lending is not yet as aggressive as it was during the peak of the credit bubble
• Taken together, this is likely to keep pushing prices up, while continuing to lower the expected future returns on real estate
• It could also lead to an escalation in new development. After many years of low levels of new construction in nearly all G-20 countries, most major markets can easily absorb moderate additions to inventory without creating an oversupply problem.