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REAL ASSETS
Game on for nimble property investors
Uncertainty around ongoing Brexit negotiations presents attractive openings for opportunistic real estate investors, says Cohen & Steers’ Rogier Quirijns. He talks about the importance of staying alert and liquid
Brexit uncertainty has been an investor’s nightmare over the past few years and although the die is finally cast, it remains to be seen how formal withdrawal negotiations between the UK and EU pan out. Nevertheless, Citywire AAA-rated Rogier Quirijns, head of European real estate at Cohen & Steers, believes things could be looking up for active investors in this sector.
‘Being active and liquid in the REITs market gives you greater opportunities at lower cost than the direct market. You can’t play the direct market in the same way, as there are inherently more transaction costs and therefore, investors will need a longer horizon to recoup their investment,’ he says.
‘Normally our portfolio is based on the bottom-up analysis of a company or sector on a three-year forward outlook. We look for longerterm opportunities in the logistics sector, self-storage and healthcare sectors. I would refer to our current London office exposure as a more opportunistic trade based on relative value versus other European office markets,’ he adds. Rogier Quirijns, Cohen & Steers SAM SIMMONS Reporter ‘Although we’ve been underweight London offices for some time, we have seen some relatively attractive opportunities since Q3 last year. We have bought more in the sector, but I would say we are still market neutral at best. It really hinges on what happens with the negotiations between the UK and the EU and
whether we get greater clarity in the coming months.
‘For now, I am happy being on the fence, but let’s see what happens next. If there is a good deal where the UK can benefit over the long term, and the government is delivering on its promises, then there might be a longer-term period where you want to be overweight in London offices or maybe even UK regional offices.’ STAYING AGILE Quirijns is conscious of beinig able to play themes, which change depending on the political climate at any given time. Having liquidity in his portfolios allows him to react accordingly and stay ahead of the curve.
‘Political uncertainty is likely to remain paramount for the years to come and therefore, the ability for investors to reallocate between region and sector will be vital.’
POSITIONED FOR HARD TIMES Quirijns, who runs the Cohen & Steers Sicav European Real Estate Securities fund, expects a harder Brexit when the time comes, but has 31% of his portfolio invested in the UK. He also has 19% invested in the office sector as of December 2019.
Fund managers aren’t the only ones with an eye on the post-Brexit UK property market. Jonathan Unwin, a fund selector at Banque Havilland, believes the knock-on effects may deter some overseas buyers from entering the UK space but it’s unlikely that this will have too much effect on overall demand.
‘The negative effect for buyers will be higher asking prices as already seen in the post-election property data. From speaking to our clients, many of whom are property professionals, there was plenty of pent-up demand in the run-up to the election. It wasn’t so much a lack of confidence in property as an asset class or investment, but more that buyers and sellers were holding out for more favourable prices. It was this factor that led to a stagnation in the market, as opposed to lower sales values,’ he says.
He adds: ‘We expect sterling to appreciate over the year so this may eventually deter some overseas buyers, but low rates and improving fundamentals point to solid demand.’
NOT LOOKING FOR A UK TOP-UP When looking at his own exposure, Unwin says he is unlikely to add any UK property, and would not consider REITs either. ‘Most of our clients will have sizeable and varied property exposure already, so it makes little sense to include more in our investment portfolios.
‘We wouldn’t look at REITs because of the close correlation with equities, but I have seen
some interesting long/short property funds that could offer diversification benefits.’
I N S I D E R
RAPHAEL KASSIN EM Debt Consultant, Sandy Lane
The year started with a bang for risk assets and that included emerging market bonds. Hard currency sovereign EM was up 1.61% in January and the corporate index gained 1.6%. This was expected, as markets are in Goldilocks mode and are expected to be that way for all of 2020. Emerging market local currencies continued to buck their dollar counterparts’ trend and lost 0.74% in January. Considering current US growth conditions and the magnetic pull to USD assets, this trend may continue for some time, at least in index terms.
There are many reasons for markets to be excited. Most importantly, trade dispute bragging levels have subsided, allowing commerce to function again. Next, the US presidential impeachment soap opera has ended with a whimper and as a result, a Republican win in November appears more likely than before. Markets like that because Republican presidents are generally favourable to tax reductions and Donald Trump will surely be planning a fiscal cut to bolster his bid for re-election. Lastly, the US economy continues to grow near 2% and company earnings are good.
GOING VIRAL The only threat to this scenario seemed to be the recent appearance and spread of thousands of infections and, so far, 1,000 fatalities related to the coronavirus. The scare shook markets in January and as of this writing, continues to make daily headlines. But the threat from the virus will eventually subside. Luckily, Fed chairman
Goldilocks beds down for an extended stay
Our columnist says markets are likely to maintain their positive balance all year and EM dollar bonds are set benefit. However, in the absence of bears there are some elephants in the room
Jerome Powell has already come to the market’s rescue and alerted investors to the possibility of his support, if needed. Keep in mind that the Fed was already primed to save the economy from a sub-2% growth rate, and inflation is still under control.
ARGENTINA’S DANCE WITH DEBT In the emerging universe, investors continue to follow last year’s highlights for potential stress and Argentina is on top of everyone’s list for volatile news. The new government continues to hint at some type of restructuring and a ‘sure loss for investors’, but there has been no final definition yet. Recent rumours point to maturity lengthening, lower coupons, a grace period for coupons and maybe, an acceptable level of haircut. Because of that and because payments continue to be made, bond prices have stabilised. Continue to tango, in case the music does not stop.
LEBANON’S CHANGING OUTLOOK Lebanon is also on investors’ radar, as it now has a government, though rumours are it is well connected with the usual political class. Public protests continue, the population is suffering economic difficulty and discussions centre around the next debt repayment in March. Bonds are trading between 32 and 35 cents on the dollar and the country’s future hinges on the path chosen for debt management. Stay tuned too for a potential entry point.
EYES ON ECUADOR Ecuadorean bonds have been volatile too in recent months and the future may offer more opportunities. After the government suggested internet-related taxes, people protested, so the government backtracked and proposed a new fiscal package. The latter was approved, leading the IMF to renew its financing programme, which
is a positive outcome. The country’s bonds dropped first, then recovered a little and now offer attractive yields above 10%. Investors are now focused on presidential elections in February 2021 .
TABOO SUBJECTS Brazil remains the elephant in the room for most investors, however. President Jair Bolsonaro’s team managed to have a pension reform approved last year and as a result, the country’s GDP barely grew in 2019 but there are high hopes for economic growth in 2020. The government’s success will hinge on being able to deliver fiscal reform now, while remaining re-electable. Investors are forward-looking and if the exchange rate is a predictor, volatile times may be ahead. The other elephant in the room is Venezuela. During tensions with Iran, President Nicolás Maduro unsuccessfully attempted to oust opposition leader Juan Guaidó. Now that the latter has returned from a foreign tour and has received more international support, it will be important to follow Maduro’s next steps. As sanctions do not seem to be having the desired effect, investors are watching with caution.
Overall, most emerging countries are struggling to produce high economic growth in the current global environment. But bonds remain attractive and the asset class continues to add value to smart asset allocators. This may be another year of African bond outperformance.
