By Jean-François Jacquet, Chief Investment Officer at KBL Luxembourg.
One might have expected that, following several years of above-average global GDP growth, the world’s outstanding debt pile would have decreased. Well, think again.
At the end of the first quarter of 2018, worldwide debt – including corporate, government, financial and household debt – stood at a new all-time high of $247 trillion, representing nearly 320% of global GDP.
In the US, deficit spending by President Trump has sent government debt rapidly higher; in Europe, too, governments have not taken advantage of stronger growth and low interest rates to diminish their debt burden. In emerging markets, debt in countries like China and Argentina remains a real worry for certain investors.
The fear that some governments may either default on their debt or try to erode it via higher inflation is not completely unfounded.
That’s why today’s investors are especially attracted by tangible assets that offer predictable cash flows, preferably inflation-proof real assets. Real estate is one such asset class – though it comes in different shapes and sizes.
Investors can buy bricks and mortar or acquire “paper” property via so-called Real Estate Investment Trusts (REITs), regulated companies that own, operate and/or finance income-producing real estate. Such property can range from residential homes to commercial property and from timberlands to toll roads.
REITs can be complementary to investments in physical real estate by providing access to property sub-sectors – including office, retail, industrial and residential, across a range of geographies – that are out of reach for most investors due to the high up-front capital requirements. Importantly, REITs also increase portfolio diversification and reduce the risk that necessarily accompanies investing in just one or a handful of properties.
Given the relatively low entry costs, increased liquidity and diversification benefits, it’s hardly surprising that the global REIT market has exploded from a fairly modest $300 billion in 2003 to some $1.7 trillion at the end of 2017.
REITs set themselves apart from pure property developers and pure infrastructure plays – and are also very different from real estate certificates, which often invest in only one asset. A REIT likewise differs from a real estate mutual fund, as the latter is not the owner of the physical property and does not manage the related daily business of collecting rent and ensuring portfolio growth over time.
Another feature that sets REITs apart is that they are often dividend-paying machines.
That dividend frequently provides the bulk of the total return – a result of the requirement to pay a large part of the net profit via dividends to shareholders. Consequently, REITs often boast high dividend yields.
At a time when interest rates remain at historic lows, such steady dividend yields hold particular appeal. If bond yields rise rapidly, however, their absolute yield levels may at some point in time compete head-on with REIT dividend yields.
Consider the United States, where rising bond yields have reached levels approaching those of domestic REITs. In Europe, by comparison, that’s not at all the case. With Bund yields still close to zero, the absolute spread levels with REITs are incredibly attractive, and can range between 4-6%.
Of course, REIT dividends depend upon revenue-generation, reflecting factors such as occupancy rates and rental income. To that extent, REITs aren’t any different from bricks-and-mortar property – and investors cannot assume that every REIT will provide a sustained return.
In the end, investing in paper real estate can prove no less complex than buying physical property. Both offer diversification benefits and recurring income, and both face a range of potential headwinds, ranging from rising interest rates to increased global economic uncertainty.
The best advice anyone every provided in this regard? “Don’t wait to buy real estate,” the American humorist Will Rogers recommended. “Buy real estate and wait.”
Publié le 08 février 2019