Improving real estate fundamentals and support from credit markets will help drive healthy earnings growth

Improving real estate fundamentals should help drive healthy earnings growth over the next few years, with worldwide revenues expected to be a strong source of that growth, LaSalle Investment Management (Securities) said in its recently released 'Quarterly Review and Outlook'.

Despite a pullback late in the second quarter, results were positive for global real estate companies, which performed considerably better than the broad market. Year-to-date, property stocks have gained 8.1% and the broad market index is up 3.3%.

Ernst-Jan de Leeuw, Head of Real Estate Securities, Europe, LaSalle Investment Management, expects worldwide earnings per share growth to be in the mid to high single-digits per annum through 2013, with the strongest growth in the US, UK and Hong Kong.

"In the UK, real estate shares were up a strong 10.4%, far better than the broad market (+1.6%). Inflation in the UK is running higher than in Continental Europe, and many UK investors look to real estate for offering inflation protection. Rental growth forecasts are positive in office and retail, and we think occupancy rates will remain stable in these sectors.

"We are seeing companies with London office and UK retail reporting healthy capital value increases, and they are shifting their growth focus to higher-yielding/higher risk development projects in these sectors. M&A activity is expected to increase as several companies in the UK are trading at discounts to NAV and so the outlook for the UK market remains positive.

"However, the story in Europe is slightly different. Real estate companies on the continent gained 3.3% in the quarter, which is better than their broad market index (+0.2%). But real estate fundamentals are mixed, with the Southern tier counties – especially Greece – continuing to be plagued with fiscal and economic concerns, while growth in Germany exceeded expectations and Sweden and France were in-line.

"The investment market has improved and values are rising in select markets, but the leasing market remains flat-to-weak. Prime assets are seeing the strongest demand with continued yield compression and new building supply continues to be delayed or deferred as private real estate owners are still slowly deleveraging."

Speaking about the outlook for the global real estate market, Ernst-Jan de Leeuw added, "The majority of public real estate companies are well positioned for the current market environment with higher quality assets, strong balance sheets and quality management teams.

"With the rebound in stock prices, capital raising activity completed, and access to the debt markets in favorable terms, the public companies are in a strong position to pursue acquisition opportunities and grow their portfolios."

The outlook for real estate securities remains closely tied to the credit markets and the outlook for the economy, the report said. The most recent economic forecasts for the global economy, while still showing reasonable growth of 3.4% in 2011 and 3.9% in 2012, are somewhat lower than those made earlier in the year as credit concerns remain in the euro zone and efforts by Asian governments to control speculation and inflation may lead to somewhat slower growth in those economies.

Real estate fundamental trends are expected to vary according to the growth of individual economies and the pace of new supply. In the U.S. and Europe, the report anticipates a gradual improvement in real estate fundamentals over the next 12-24 months driven by moderate growth in demand and limited new supply.
Second quarter review: US and Asia-Pacific

US REITs were average performers among global real estate stocks this quarter, up 3.6% and outpacing the broad US market index, which gained 0.2%. Investor concerns about a slowing in the recovery of the US economy affected both property companies and the broad market late in the period.

US real estate sector returns were widely dispersed this quarter. Regional mall REITs gained nearly 9% and apartment REITs were up almost 7%. Lagging sectors inclu

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