Real estate performs best when gross-domestic-product (GDP) growth is positive and real interest rates are low. Our post-Brexit GDP growth estimates are modestly lower, yet we do not expect real interest rates to rise. Globally, real estate should deliver average to above-average returns in many markets. The United Kingdom (UK) might slow, but markets like Australia, South Korea, Germany, Spain and the U.S. remain favorable.
Outside of the UK, we don’t see material valuation shifts. Initial yields are stable while bond yields have come down, thus spreads are wider. With property supply and demand remaining balanced, we have upgraded our return outlook in certain markets. Supply risk remains well below average, with only a few exceptions such as Singapore, Houston, London and some late-cycle supply in certain Australian markets.
In the listed market, real estate will become the eleventh Global Industry Classification Standard sector at the end of August 2016. We believe this may lead to lower volatility and correlations over time. Also, generalists are estimated to be underweight the Real Estate Investment Trust (REIT) sector by c. $95bn, which could provide support. REIT dividend yields are now at 4.0 percent and well supported by underlying free-cash-flow yields of 5.0 percent. Payout ratios are low by historical standards and could provide an opportunity for high-single-digit dividend growth in the near term.
Sources: Bloomberg Finance L.P., Deutsche Asset Management Investment GmbH; as of 6/24/16