After a disappointing 2013, returns on real estate beat equity returns by a wide margin year-to-date. Improving fundamentals and attractive valuations, coupled with a relatively stable bond yield environment translate into a sweet spot for real estate. These are the conclusions of a recently published report by ING IM, which holds an overweight position in global real estate equities.
Real estate underperformed in 2013
Real estate equities - or real estate investment trusts (REITs) - underperformed the broader equity market substantially in 2013. As the graph clearly shows, the strong rise in bond yields (sparked by Ben Bernanke’s taper talk) and as a consequence in mortgage rates in the US was the main factor behind the underperformance and overruled the stabilization and/or improvement in the underlying fundamentals.
Year-to-date, real estate equities are the best performing asset class. Both in the US and Europe, real estate is outperforming equities. Japan is the odd man out with real estate underperforming an already weak equity market.
Economic backdrop is improving
The strong year-to-date performance of real estate is not a big surprise to us, as the environment has improved in recent months. An improving global macroeconomic backdrop, illustrated by increasing real estate prices and transactions is combined with relatively stable global bond yields.
You may access ING IM’s full report through this link.