Predictions of cooling UK housing markets are driving investors to look to international property opportunities. Economists and analysts have recently warned of a cooling housing market due to increasing UK interest rates set against a global economic slowdown and concerns of a UK property market correction. Justin Modray, investment adviser at Bestinvest, says Germany, Australia and possibly Japan are currently thought to be good value.
There is also a natural bias from investors toward the US property market because of the country’s strong Reit structure, he says. The UK property market appears to be running out of steam, with the issue of yield compression affecting returns. These market conditions mean it is a natural progression for investors to look overseas, particularly because of the cyclical nature of commercial property, he says. Funds with a global mandate can look at where the country’s economic cycle is placed and take advantage of favourable global market conditions. However, it is important for investors to consider how their property fund works, Modray notes.
“Many investors like property as a way of diversifying their portfolio away from shares into bricks and mortar investments,” he says.”However, the risk is that many Reits invest in property companies linked to the performance of the stock market. This negates the benefits of diversification.” David Coombs, director of multi-manager investments at Barings, says he is currently looking at the German property market. His property fund, the Barings Multi Manager Property portfolio only invests in commercial property and currently has 30% invested in opportunities outside the UK.
Coombs’ interest in international property growth is driven by his belief that high returns achieved in the UK commercial property market in recent years are unsustainable. In the past, commercial property was undervalued but future returns will need to be driven by value-added management and rental growth, he believes. The German commercial property market has potential for growth, and strong demand from overseas investors over the past six months supports this, he says.
Commercial property in France and Spain offers similar opportunities, he adds. Simon Ward, economist at New Star, believes the German and Japanese markets could be in the early stages of sustained recoveries. “Foreign housing markets offer mixed opportunities. Further weakness is likely in the US and frothy conditions in France and Spain could unwind on the back of tighter ECB policy,” he says. Meanwhile, Ward believes the MPC interest rate rise will lead to a cooler UK housing market for 2007, but not outright weakness. “Market activity and price gains will slow progressively during 2007, but the main downside risk is further interest rate rises,” he says.
“I think there is a reasonable chance of another 0.25% rise early next year. Factors likely to limit any weakness include stable to firm labour market conditions as economic growth remains. “Confidence may prove more resilient on this occasion, partly because the wider economy is doing well, but a slowdown in buying interest is likely in the New Year.”
Source: Investment Week