GLOBAL - Cohen & Steers, the US investment firm specialising in real estate, remains confident that the majority of global listed real estate companies will weather the economic crisis despite the poor lending environment, according to its latest Review and outlook for the international real estate markets.
Cohen & Steers has predicted listed property companies will have enough operating capital to last until 2010 but expects those with recurring cash flows and strong balance sheets will be the highest performers.
More specifically, it believes many companies will produce "outstanding returns" in time and, as a result, has increased holdings in its portfolios to take advantage of the high potential returns.
That said, C&S expects global real estate companies will see declines of 3% in cash flows this year because of lower demand, and this is likely to cause higher vacancy rates, albeit vacancies are unlikely to be as high as in previous downturns.
The UK, and in particular the London office market, is predicted to experience a more severe recession than the rest of Europe. According to the S&P Developed Ex-US Index, the UK had a total return of -46.3% over 2008.
Retail property stocks in France should continue being well-positioned, suggested C&S, as private consumption levels are expected to drive the economy despite falls in the country's gross domestic products.
The report warns the Netherlands' economy could decline further as a result of global trade slowing and believes Germany is unlikely to recover until international trading speeds up. German property companies returned -58.7% in 2008 and, according to Cohen & Steers, have suffered from corporate governance problems, insufficient dividend coverage and their high leverage.
Despite market volatility and slowing economy, Cohen & Steers has predicted Asia Pacific real estate markets will make a solid recovery thanks to its economies having relatively low leverage.
The cut in interest rates and conservative balance sheets of Hong Kong's property companies means they are well-positioned for the downturn, despite worsening fundamentals, according to the real estate adviser.
Japanese Real Estate Investment Trusts (REITs) with assets in Tokyo and good banking relationships are also predicted to do well thanks to the capital's strong office market. Singapore REITs, however, are likely to face refinancing issues because of the lack of capital available.
By contrast, Australia's equity re-capitalisations and monetary policy may help lessen the impact of cash shortages.
In the US, Cohen & Steers believes investors seeking higher income may start targeting real estate securities, as they recorded an average dividend yield of 7.6% at 31 December 2008 compared to a 3.2% dividend yield from the S&P 500 Index for stocks.
Balance sheets are expected to remain under pressure, however, until banks start lending again and unsecured bonds and commercial mortgage-backed securities become more available.
The FTSE NAREIT Equity Index returned -38.8% for the fourth quarter of 2008 and -37.7% for the year.
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