GLOBAL - Economic recovery has upped the prospects for long-lease prime properties in cities such as London, New York, Paris and Hong Kong, according to ING Real Estate Investment Management.
The fund manager's Q1 Global Vision report claims global transaction volumes totaling US$124bn (€101bn) in the last quarter provided evidence of their previously forecast "turning point".
It advised investors with a low-risk appetite to focus on retail and industrial, which are forecast to return 9.8% and 10.9%, respectively, in 2011-13, because they offer more stable returns in a downturn and outperform early in the subsequent recovery.
Although riskier because cyclical, the recovery in office is forecast to be "sooner and stronger" than expected, returning 10.9%. Other notable risks come from policy error as governments withdraw stimuli for economic recovery and refinancing of debt shifted from the private to the public sector, described by the report as "a known unknown in the medium term".
It said: "We continue to believe that this is a time for cautious optimism and cautious and steady accumulation by real estate investors."
Meanwhile, in the US, a fall in property values from their 2007-2008 peak has reduced the potential downside for investors in commercial property, according to a report by Pramerica Real Estate Investors (PREI).
Despite continued weak operating performance, property's fundamentals - high yields, low correlations with equities and bonds, and the potential to hedge inflation - should appeal to investors seeking stability. In addition, core commercial offered an opportunity to replicate the market portfolio, diversification, and attractive long-term performance.
"The sharp correction in commercial property values since 2007 has been painful and surprising in terms of both magnitude and speed. But it did not invalidate the fundamental arguments for real estate in a diversified portfolio," said the report.
Meanwhile, its authors described the financing gap as "massive". They said: "While the sector has attractive long-term potential, it will take some years to resolve all the distress."
They also warned that property's performance would be more highly correlated with capital markets than it had been in the past as transparency improved. However, real estate would continue to lag behind the broader economy because supply and demand respond relatively slowly to economic changes and transactions take months to complete.
The report also claimed improvements in values and tenant demand would follow the macro trend. "The only questions relate to the timing and strength of the recovery," it said.