Citywire - What are listed property markets telling us?
06 October 2009
As global markets show further signs of stabilisation, we continue to monitor the pricing of listed property markets as a good barometer of recovery in underlying commercial property markets. The listed property sector tends to be a strong lead indicator for the direct property market, preceding improved valuations in the direct property markets by around six to nine months.
Following their 60% plunge from the peak of the market in February 2007, global listed property share prices have enjoyed a strong run from mid-March this year. The FTSE EPRA NAREIT Global Index has risen approximately 80% since March 9. This rally is key for the direct property markets in a number of ways: it reflects improved overall sentiment toward commercial property; most of the companies now look to be past the worst and fit to face the next cycle, rather than being forced into administration through bank loan breaches; and a number of REITS now have excess capital following successful raisings in the public markets which should provide further stability to underlying investment markets.
The pricing of global listed property markets, along with other key triggers, is certainly suggesting that commercial property has turned the corner and that the worst of the downturn could be behind us. But of course, different property markets are at different stages of their respective cycles. The UK was first to begin its correction and appears to be levelling ahead of other markets - boosted by the sterling discount attracting overseas investors. Some markets in continental Europe have further to go before recovery looms, particularly those with an overhang of excess supply such as Dublin and Madrid. Other markets, such as Paris, could catch up quickly with the UK as trading volumes in underlying markets increase and feed through into asset valuations.
Until recently, the majority of listed property stocks were trading at large discounts to net asset value (NAV). That is, their share prices fell well below the true underlying value of the properties that they held, due to negative investor sentiment and deteriorating investment and tenant activity. However in the third quarter of this year REITS in many listed property markets, particularly the UK, have been trading at a premium to NAV.
We expect some further improvement from the listed property sector as signs of the debt crisis abate and the global economy recovers. However, it is worth bearing in mind that listed property remains volatile as equity markets continue to be driven by day-to-day news flow, in particular news related to financial stocks.
Anne Breen, Head of Property Research, Standard Life Investments
This article was first published on Citywire on Tuesday 13th October 2009.
