Direct real estate markets around the world once again provided positive performance in 2012, although momentum slowed in all but one of the nine national markets, where Investment Property Databank (IPD) Ltd. had released figures by mid-March 2013.
Canada and the U.S. led the way with double-digit returns, while Australia was close behind with 9.4 per cent. In all places, real estate benefited from its relatively high income return, which helped to offset the impact of increasingly challenging economic conditions on appraised real estate values, particularly in Europe. Looking more widely across asset classes, 2012 was a year of strong equity market performance, with the MSCI World Index posting a return of close to 15 per cent for the year as a whole. Real estate securities markets saw even stronger performance, at more than 20 per cent for most major markets.
Although slowing during 2012, this is the third year of relatively strong performance in the major global real estate markets since the downturn of 2008/09. Unlike other crises such as in Japan in the early 1990s, investors have not turned their backs on real estate but have instead looked to gain greater access to the asset class. Real estate remains the most favoured alternative asset due to its strong relative performance, high income yield and substantial diversification benefits for multi-asset portfolios.
While a pattern of positive but declining performance was seen in most markets during the year, there were still significant variations between countries and, perhaps, most strikingly between continents. Three countries – Canada, the U.S. and Australia – continued to lead just as they did in 2011. With eight of the nine markets decelerating through 2012, Ireland was the only country where returns rose, from -2.4 per cent in 2011 to 3.1 per cent in 2012.
Five of the nine countries experienced falling capital values in 2012, all of them in Europe. Sweden is the only European country to report rising values over the past year, though the 1.2 per cent increase in 2012 was significantly below the previous year’s rise of 4.8 per cent. Canada is the only one of the nine countries in which capital growth outpaced income return in 2012.
Canada is also the only one of these nine countries where capital values now exceed 2007 levels. Sweden, Australia and the U.S. have improved significantly from their 2009 troughs but capital values in these three countries still fall short of their position in 2007. In the remaining five countries, capital values have improved least, and of these both the Netherlands and Ireland have experienced consistent capital value declines. Capital value growth in the U.K. has now stalled, following a short-lived recovery in 2010 and 2011. Finland and Denmark, while never experiencing deep troughs of value loss, have seen capital values hold remarkably stable since 2009.
Despite its relatively muted recovery since the global financial crisis, however, overall real estate performance remains attractive to asset owners, due to the relativities of risks and returns across the major asset classes through the past decade. Over the past 10 years, property ownership has provided a competitive return in many markets relative to risk, expressed in terms of the volatility of returns over the same period. In both Canada and Australia, for example, total returns to direct property exceeded other major asset classes between 2002 and 2012, and this performance occurred with a low level of volatility that was comparable to that of bonds. The U.K. has been one of the few markets in recent years where the direct property return per unit of risk has proved less enticing; here, total returns fell short of both equities and bonds between 2002 and 2012, while volatility was roughly in line with equities and well above that of bonds.
Peter Hobbs is senior director of group business development at Investment Property Databank (IPD) Ltd., which provides real estate benchmarking and portfolio analysis services to clients in more than 30 countries around the world. Peter’s focus is on developing IPD’s commercial strategy. He also oversees IPD’s client facing activities, including business development and research. Peter can be reached at [email protected].
