Equity investors searching for more stable returns should turn their attention to real estate companies, which have begun to outperform across the globe, says Jon Cheigh from Cohen & Steers.
Global stocks were down 13.4% in the fourth quarter of 2018, said Cheigh, executive vice-president and head of global real estate at Cohen & Steers in New York, with all developed markets experiencing double-digit drops.
“But underneath the surface, there have been some positive stories. What we’ve found [is that] the global real-estate universe was only down 5.7%, outperforming global equities by more than 700 basis points,” Cheigh said in a Jan. 18 interview.
Looking to Asia-Pacific as an example, the equity market in Q4 2018 was down 11%. Meanwhile, real estate stocks were only down 0.9%, said Cheigh, whose firm manages the Renaissance Global Real Estate Fund.
So what was driving this outperformance?
“It’s several durable attributes,” said Cheigh. “Firstly, real estate companies tend to pay a very tangible and above-average dividend yield. Secondly, the earning streams of these companies tend to be much more durable and less volatile than the average company.”
Solid income streams
Contractual income is a big factor that provides real estate companies with ongoing cashflow.
Offices, apartment buildings, warehouses and shopping centres are on leases, which can last three to 15 years, explained Cheigh. These leases drive the income, or cashflows, of company stocks.
So even though the global economy might expand or contract in a given year, real estate companies will continue to generate contractual income.
“This is why you would expect that a real estate company that generates its cashflow from these kinds of sustainable and durable cashflows and leases should be much more defensive than if you were to invest in an auto company, an airline, or someone that was manufacturing and selling iPhones,” Cheigh said.
Real estate stocks also fluctuate less based on some global issues, like trade wars, because most of these companies are not multinationals, explained Cheigh.
“They tend not to have supply chains,” he said. “These are companies that own shopping centres, apartment buildings, and office buildings. And what drives them is their local economy.”
Another factor leading to real estate’s outperformance is that while equity markets have seen their earnings multiples expand over the last several years, real estate companies have not.
“Some of the very strong returns in the equity market the last few years have not been from earnings growth. It’s from multiple expansion,” said Cheigh.
That hasn’t been the case with real estate companies, where there’s been “healthy” earnings growth. “Earnings multiples have been very stable over the last five or six years,” he said. “In some cases, they contracted.”
So higher yields, durable cashflows, attractive valuations and less volatility has led to outperformance in real estate stocks, he said.
“In a market where some were concerned about slowing growth, high valuations of things that had gone up a lot over the last few years, or trade wars, this was an industry that did not have those problems,” said Cheigh. “To us, it’s quite unsurprising that we’ve seen this rotation of capital into what we think are good fundamentals and a good valuation.”
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