CHICAGO—Globally, both overseas and domestic investors are likely to expand their real estate allocations, according to LaSalle Investment Management. The Chicago-based firm just released its Mid-Year 2015 Investment Strategy Annual report, and found that with a steady, cyclical recovery underway around the world, and with interest rates remaining lower for longer, benchmark bond and real estate debt costs remaining low, real estate continues to be attractive. Furthermore, demographics, technology and urbanization continue to drive demand for space in specific areas.
Real estate will have advantages over other investment options due to “the stable income produced by core assets generating yields at a healthy premium to sovereign and corporate bonds,” the firm found, among other reasons.
“At the end of last year, we identified the cyclicality of real estate as our main theme,” said Jacques Gordon, LaSalle Investment Management’s global head of research and strategy. “Since then, a number of the cyclical trends have played out even faster and more intensely than we gave them credit for.”
“The cycle question weighs heavily on our minds as we anticipate a very active buying and selling season in the second half of the year,” he added. “The best “cycle insurance” we can recommend is to keep leverage levels at the conservative end of the acceptable range, and to choose investments that will continue to get a boost from secular shifts, even if cyclical trends turn negative. Investors should avoid compromising on asset quality and stick to deeper tenant markets as we enter the late stages of the value cycle. When a property’s ability to attract tenants is compromised in a recession, weaker properties in smaller markets nearly always suffer the greatest drops in value.”
LaSalle also found that real estate fundamentals and prices continued to improve in the US in the early part of this year, but were flat or down in Canada and Mexico. The firm found that “even with interest rates edging up, unleveraged US core real estate remains fairly valued relative to bonds and other fixed income alternatives.”
LaSalle believes the better buildings in the better US markets remain good long-term investments and continued strong user and investor demand will benefit warehouse development. “Areas with improving transit and infrastructure including Los Angeles, Denver, Washington and New York are best placed to benefit from DTU-linked themes,” the firm added.
The European market has recently seen improvements to its underlying fundamentals and LaSalle has revised upwards its rental growth forecast for the region. Furthermore, it found that oversupply risks are in check in most markets. “In the UK, investors should focus on assets linked to DTU themes including improved infrastructure and demographics, a lack of obsolescence, and locations where tenant demand will be rewarded by increased rents in the short term,” the researchers said. “More widely, investors seeking to expand their core and core+ portfolios should focus their attention on dominant or hard-to-replicate shopping centres in cities such as London, Paris, Berlin, Munich and Amsterdam.”
The Asian region has relatively robust demand and low interest rates, according to LaSalle, and “foreign institutions are gradually increasing their allocations to Asia, while domestic and regional investors remain active, meaning it will remain a competitive environment to allocate capital.” In China, the firm recommends logistics development, although these assets remain hard to access.