Property markets outlook remains strong as golden age fades: PGIM

The logo of PGIM is seen at the entrance of the compan's office in Tokyo

NEW YORK (Reuters) – A golden period in global property markets appears near an end as rising interest rates and lower returns hurt performance, but the outlook for real estate remains strong, asset manager PGIM said on Tuesday.

Long-term pricing looks sensible and offers decent protection though investors will need to search to find attractive income streams and sources of growth that can deliver target returns, said the investment management arm of Prudential Financial Inc.

Following the financial crisis of a decade ago, investors benefited from historically low interest rates, low valuations and rising rents, resulting in returns not seen since the 1980s.

There is no evidence of mispricing in major markets, leverage has been reduced and prime real estate is priced at about fair value, said Peter Hayes, PGIM Real Estate’s global head of investment research.

“There is no obvious trigger out there that would point to a collapse in real estate values,” he said. “There’s definite investor nervousness (but) that’s always been the case. But there’s no evidence of systemic risk,” he said.

PGIM, which manages $65.9 billion in real estate assets, said opportunities can be found in non-gateway U.S. markets such as Dallas and Phoenix and non-central business districts in Asia and Europe, where office rental demand looks strong.

Ongoing demand for warehousing in the United States and elsewhere because of e-commerce and the world’s growing middle class, which is driving tourism, especially in Asia, also offer opportunities, PGIM said in a presentation.

Caution, which has reigned since the global financial crisis, still prevails as investors take their foot off the pedal a little bit after the superior returns from 2010-2015, Hayes said.

In core U.S. real estate assets those returns were in the mid-teens and now will likely be in the high single digits, said Eric Adler, chief executive of PGIM Real Estate.

The number of global transactions fell in 2016 but were still high from a historical perspective, suggesting continued competition for deals, PGIM said. However, the amount of capital targeting real estate has dropped slightly and pricing pressure in global markets has cooled, it said.

Eight global gateway cities – London, Paris, Hong Kong, Tokyo, New York, Los Angeles, San Francisco and Washington – account for about one-third of investment capital, Hayes said.

(Corrects last paragraph to read “one-third of investment capital,” not “one-third of cross-border deals.”)

(Reporting by Herbert Lash; Editing by Marguerita Choy and Steve Orlofsky)