UK Quoted Real Estate Sector- A Half Year Review
We are now half way through 2015 and the quoted real estate sector continues to generate attractive returns as evidenced by the EPRA/ NARIET UK Index which delivered a total shareholder return of 8% for the first six months of 2015.
The EPRA/ NAREIT UK Index which comprises UK quoted real estate companies and REITS, has significantly out-performed the wider equity markets for the first half of 2015 beating the FTSE 100 by a massive 491% and the FTSE All share by 166%. Only the FTSE 250 has out-performed the EPRA/ NAREIT Index delivering a total shareholder return of 10.5%. I am pleased to say that my own company NewRiver Retail has out-performed all of the UK main equity indices including the EPRA/NAREIT UK Index and even the FTSE 250 as we have delivered a total shareholder return of 11% for the first six months of 2015.
The out-performance of the quoted real estate sector relative to the wider UK equity markets is no flash in the pan when you assess total shareholder returns over a five year period and even on a longer period of 15 years.
Over the last five years the EPRA/NAREIT UK Index has delivered a CAGR of 18.6% out-performing the FTSE 100 by 130%, the FTSE All Share by 103% and even the FTSE 250 by 18%. When assessed over a fifteen year period the quoted real estate sector has on a total shareholder basis, beaten the FTSE 100 by 176%, the FTSE All Share by 100% with only the FTSE 250 out- performing real estate.
This long term out-performance is a credible result given how badly real estate was affected by the great financial recession. There can be no doubt that in the run up to the financial recession the quoted real estate sector was over leveraged. A good example of this impact is the comparison between the peak to troughs of the FTSE 250 and the EPRA/NAREIT UK Index. The FTSE 250 peaked in May 2007 and over a nineteenth month period declined 53%. The EPRA/NAREIT UK Index, however, peaked earlier in January 2007 and declined by 81% levelling out in March 2009.
What is interesting is that the FTSE 250 has fully recovered from the financial recession with that index now trading circa 50% above the pre-recession peak, whereas the EPRA Index is circa 37% below its pre-recessionary peak. Even the FTSE All Share and the FTSE 100 is much further ahead than the EPRA Index with both being -3% and +2.6% respectively ahead of the pre-recessionary peaks.
Looking ahead to the rest of the rest of 2015 and beyond, there is a view that the wider equity markets will be rotating into a period of lower investment returns now that the US Federal Reserve is signalling an increase in rates.
The Federal Funds Rate, widely regarded as the global risk- free rate, has been at historic lows for a number of years. Given that all asset classes are priced relative to the fed funds rate, an increase in the fed funds rate has the potential to reduce the growth of asset valuations thereby reducing investment returns.
The majority of the total returns generated over the last five years have been from capital growth but given that we are potentially entering into a period of more modest capital growth, then the importance of income returns will increase.
This is why the quoted real estate is very well placed to continue out-performance of the wider equity markets including the high performing FSTE 250. Not only does the quoted real estate sector provide a higher income return (eg NewRiver Retail with a dividend yield of 5.6%) than the wider equity markets, the quoted real estate sector is still some 37% from its peak pre recessionary position. I accept that the previous real estate peak will have been inflated from over leverage but even so when compared to the FTSE 250, All Share and the FTSE 100, real estate has the potential for further capital growth.
So overall I am very confident that by the end of 2015, the quoted real estate sector will have comfortably out-performed all of the main UK equity indices with the exception of the FTSE 250 and that out-performance will carry through into 2016 even beating the mighty 250.