Timbercreek Asset Management has released its 2017 Market Outlook which identifies key trends the firm sees playing out for global real estate securities in the year ahead. Overall, the report predicts strong performance across regions including Canada and the United States, with the firm forecasting that global REITs are priced to deliver total returns in the range of 8.5% and 10.5%.

“Global real estate is well positioned to experience another year of growing demand and modest supply, which combined with attractive public market valuations should lead to positive total returns in 2017,” stated Corrado Russo, Senior Managing Director, Investments, Global Head of Securities, Timbercreek Asset Management. “More generally, we believe a rising interest rate environment signals a brighter economic outlook and a return to moderate inflation—which means more people working in office buildings, more household spending and more income to be spent on travel and hotels.”

On the Canadian real estate sector, the report notes the following:

-The outlook for the retail sector remains positive, particularly for REITs with portfolios concentrated in major  urban centres. Timbercreek sees strong demand from tenants for well-located, high-quality shopping centres as  retailers cluster to high population densities and areas where household incomes are above average.
-The national apartment market will remain attractive, with asset values continuing to be supported by immigration,  limited new supply and deterrents to home ownership including high prices for single-family homes and stronger  mortgage rules.
-The steep decline in oil prices that has created a bifurcated market is most evident in the Toronto and Calgary office  markets, which will continue into 2017.

With regards to the U.S. market, Mr. Russo notes, “President-elect Trump’s campaign promises, including his agenda of lower corporate and personal taxes, higher infrastructure and defense spending and less financial regulation have the potential to result in a significant increase in fiscal stimulus. If implemented effectively, this could lead to renewed economic growth in U.S. GDP, more jobs and better longer-term productivity.”

Furthermore, the report predicts a bullish outlook for the U.S., based on the following considerations:

-Trump’s combined policies, should they be implemented, could lead to stronger economic growth, with the hotel  sector realizing the largest benefit. There is a strong historical correlation between GDP growth, corporate profits  and REVPAR (Revenue per Available Room) growth. Although lodging supply is anticipated to be greater than  demand in 2017, this is already reflected in stock prices.
-The potential for lower taxes and increased employment should have positive implications for consumer sentiment  and spending, benefiting industrial real estate fundamentals driven by greater demand for space by e-commerce  tenants as online sales continue to capture greater market share. Timbercreek also sees increased spending  benefiting bricks-and-mortar shopping centres and regional malls.
-Higher infrastructure spending should drive up construction labor costs and increase building costs on commercial  real estate. Further, higher inflation could stymie new supply, while lower supply and higher replacement costs are  ultimately a positive for existing real estate assets.

Highlights – Other Markets:

-United Kingdom and Continental Europe: The U.K. economy and London’s real estate market in particular will  remain under a cloud of uncertainty until there is greater clarity as to the direction of Brexit negotiations. European  office vacancy rates are seen falling due in part to restrictive financing for speculative development.

-Japan: Cyclical property types such as lodging will generate the highest net operating income growth in 2017 as  tourism remains a key focus for the government ahead of the 2020 Tokyo Olympics.

-Hong Kong and Australia: While Hong Kong economic growth is expected to remain sluggish, the office market      looks attractive heading into 2017 given supply in Central Hong Kong is still non-existent combined with strong  demand from Chinese financial institutions. Australian asset values will continue to rise driven by modest GDP  growth and interest rates that are anticipated to remain at low levels.

“All in all, we believe global real estate fundamentals are strong, with global REITs trading at a discount to NAV and providing an attractive dividend yield that is fully covered, stable and growing”, Mr. Russo concluded.

Source: Timbercreek Asset Management