As concerns about the global economy weigh on stock markets, real estate investors are being advised to prepare for the next downturn in their sector.
LaSalle Investment Management has published its latest strategic note, advising investors “to take out cycle insurance” to safeguard against the advent of falling or plateauing values.
The company’s investment strategy annual recommends taking precautions as more markets enter a mature phase in the “real estate pricing cycle”.
It recommends reducing portfolios of non-strategic assets, reducing leverage and being aware of liquidity needs if and when credit tightens.
In the short-term, investors should focus on taking leasing risk where markets are strong, pursuing development in strong, supply-constrained markets and “bidding on strategic long-hold assets that are most likely to be able to withstand a downturn”.
Jacques Gordon, global head of research and strategy at LaSalle, said: “Real estate investors have enjoyed six consecutive years of positive value increases in most countries and now is the time for them to take out ‘cycle insurance’ – to assess their portfolios in preparation for the inevitable transition from rising values to either a plateau or falling values.
“In this mature phase of the capital markets cycle, we highlight various forms of defensive ‘insurance’ that portfolio managers can use to prepare for an uncertain future.”
American Realty Advisors has also warned investors against the temptation to “stretch for additional yield and shoot for making outsized gains”.
In a research note, the company said: “Rather, conditions suggest that now is the time to focus on stability, superior income growth, and pricing resiliency as the likelihood of an economic downturn or financial instability event increase.”
Prepared by Chris Macke, managing director of research and strategy at American Realty Advisors, the report said: “There is more downside to being overly aggressive than overly conservative”.
It continues: ”Despite the warning signs, some investors continue to take on more risk, seeking out smaller markets in search of marginally higher yields at a time when prices are elevated, the economic recovery is entering the mature phase, global growth is weakening, and financial market volatility is increasing.
“This is likely happening since multi-asset investors are facing weak equity and bond returns and are incorrectly relying on commercial real estate to be the alpha generator in their portfolio.”
To read more from Jacques Gordon on whether real estate markets have peaked and how investors should approach 2016 look out for the next edition of IPE Real Estate magazine.