The U.S. financial crisis in 2008-2009 left many investors with a reluctance to take investment risks, particularly those related to any of the world’s wilted housing markets. However, as your local real estate agent would likely tell you, the market in one location can be vastly different than it is in another. Wilson Magee, co-manager of Franklin Global Real Estate Fund would agree that the adage “location, location, location” applies not only to individual home buyers and sellers, but to investors seeking opportunities in the commercial real estate sector, too. While real estate went bust in some areas of the world, it continues to boom in others. For that reason and others, Magee believes global Real Estate Investment Trusts (REITs) are worth a look.
In uncertain times, investors tend to look for perceived “safe havens,” such as government bonds. But perilous mountains of debt in many developed economies thought to be relative safety zones have made investors rethink whether “safety” is really obtainable or just an illusion. And, the ultra-low interest rate environment in the U.S. and many other economies has caused yield-seeking investors to rethink the cost of “safety” and their views of risk. For some, dividend-paying stocks have fit the bill. Magee says that dividends are among the potential benefits of REITs (companies which own, and in many cases, operate income-producing real estate), too.
“Dividends have been an important source of real estate returns. In the U.S. REIT market over the last 20 years, dividend growth has averaged 7% per year, well in excess of inflation, which has averaged about 2.5% per year1. And growing dividends further differentiate listed REIT investment from fixed income.
In addition to an attractive income stream, real estate securities can also offer several key investment benefits, including diversification from traditional asset classes and liquidity. Additionally, because real estate cycles of different countries are relatively distinct and generally have low correlations with one another, we believe investing globally can help reduce volatility.”
Magee’s job involves scouring the globe for potential real estate opportunities. You may be surprised to learn where he’s been finding these potential pillars of real estate investing strength—and why.
“The year (2012) saw generally strong investment performance for property stocks in Europe and the United Kingdom despite the significant economic and fiscal challenges that remained. Arguably even less driven by fundamental growth than the performance in the Asia-Pacific area, property companies in the Eurozone generally reported stable operating conditions amid the uncertainties swirling throughout the region.
The Road Ahead
Magee thinks the U.S. might experience some of the strongest fundamental property trends among developed markets, but he sees positive signs globally, too.
“While U.S. property stock prices overall have rebounded to pre-global financial crisis peaks, this has been supported by strong fundamental operating recoveries, led initially by rental apartments and hotels, and now permeating most property sectors. As in many markets globally, positive top-line growth trends generally have been magnified by consistently declining finance costs, leading to increased profitability. This overall trend of improving profitability coupled with healthy balance sheets has encouraged many property companies to raise dividends.
In our view, valuations are attractive and earnings trends have been generally positive. We think those earnings trends are likely to continue for the next several years because construction in most of the major markets is very low, and we think this means less competition. Given the long development lead times before projects typically are delivered, we feel we can be confident in that view.”
For the multitudes of people and investors whose livelihood is tied to real estate, that should be music to their ears.
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What Are the Risks?
All investments involve risks, including possible loss of principal. Diversification does not guarantee a profit or protect against a loss.
Equity REITs may be affected by any change in the value of the properties owned and other factors, and their prices tend to go up and down. A REIT’s performance depends on the types of and locations of the properties it owns and how well it manages those properties. REIT fund investment returns and share prices will fluctuate with market conditions, and investors may have a gain or loss when they sell their shares. Dividends are not guaranteed, and can increase, decrease or be totally eliminated without notice.
Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in a portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. These and other short-term fixed-income investments are considered to be low risk as they offer the most stability, but very little long-term growth potential.
The Franklin Global Real Estate Fund concentrates in real estate securities which involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. The fund’s investments in REITs involves additional risks, since REITs typically are invested in a limited number of projects or in a particular market segment they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Foreign investing, especially in emerging markets, involves additional risks such as currency and market volatility, as well as political and social instability. Also, the fund is a “non-diversified” fund and investing in a non-diversified fund involves the risk of greater price fluctuation than a more diversified portfolio. These and other risks are described more fully in the fund’s prospectus.
1. For 20 years ended Dec. 31, 2012. Source: NAREIT and U.S. Department of Labor. “NAREIT®” is a trade mark of the National Association of Real Estate Investment Trusts. Inflation as measured by CPI. Past performance is not indicative of future results. Indexes are unmanaged and one cannot directly invest in an index.