Cohen & Steers calls end of real estate equities bear market

The two-year bear market in real estate stocks has run its course and fundamental recovery is already underway in key markets in Asia, to be followed by the US next year and Europe in 2011, analysts from leading investment firm Cohen & Steers told a news conference on Thursday.

'I think Hong Kong will bottom in the first half of 2010, and Singapore in the next six months. Australia may even recover sooner than first half 2010,' said Cohen & Steers’ co-chairman and CEO Robert Steers.

Steers and global portfolio manager, Scott Crowe, were speaking at the European Public Real Estate Association (EPRA) annual conference being held near Brussels.

Steers: 'In recent months we have seen significant and rapid change in the global real estate securities markets as the monetary and fiscal stimuli provided by governments has helped to bring an end to the recession. The recapitalisation of listed real estate companies is also progressing well, and together these factors will initiate a new positive return cycle for stocks.'

In a new Cohen & Steers research paper, the firm said that the real estate total return cycle is likely to unfold in three phases, starting with the completion of the equity recapitalisation that is underway to deleverage companies from their debt burdens.

This has already resulted in nearly $40 bn in capital raisings around the world since December 2008 through secondary issuance, rights offerings and corporate bond offerings. The US accounted for just under half of that figure, added global portfolio manager Scott Crowe. 'Europe accounted for about EUR 4.3 bn with Asia accounting for the remainder.'

Steers said he expected to see further recapitalisation in the years ahead. 'REITs are in a prime position. They can tap almost unlimited sources of capital. I think we will see REITs raising $100 bn annually and that could be on the low size.' Steers noted that the process of recapitalisation is just beginning. 'REITs are displaying an ability to access liquidity in unprecedented environment and face some unprecedented opportunities. I don't think we're even half way through.'

The second phase, preceding the final fundamental recovery in markets, will be characterised by significant acquisition opportunities in the US, Spain, Germany and France, and to a lesser extent in Asia.

Crowe added: 'In the longer term we believe real estate values will settle at higher levels than are generally expected by the market, as we do not see capitalisation rates (yields) spiking as high as many people anticipate. Net asset values (NAVs) for many real estate stocks are rising, driven by better-than-expected cash flows and improving cap rates. Furthermore, companies are starting once again to acquire assets, which should also contribute to value creation.'

The Cohen & Steers report concluded that the traditional 'four pillars' of attributes drawing investors to listed REITs, including competitive total returns, attractive current income, moderate volatility and low correlations with other asset classes, are beginning to reassert themselves.