The key to real estate investment is taking a global approach, says Chip McKinley, senior vice-president and portfolio manager with Cohen & Steers in New York.
Doing so means “you can take advantage of different property cycles that are going on in relatively uncorrelated or, in some cases, diametrically opposed directions,” says McKinley, whose firm manages the Renaissance Global Real Estate Fund.
It’s also important to recognize that different property types tend to react differently to economic cycles. For example, hotels won’t perform the same way as a senior living facility or an office tower.
But, says McKinley, if you stick to one region, “the problem is you’re still captive to a single macro cycle. So if you’re going through a recession, there’s really no place to hide. You can go into more defensive property types but that won’t allow you to grow.”
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A tale of two cities
McKinley has his eye on Tokyo for its office market. The city is growing much faster than the rest of the country, he says. Despite Japan’s broader growth issues, “what goes on in a single city doesn’t necessarily coincide with what’s going on at the country level. We all know that Tokyo is the economic epicentre of all of Japan,” he says.
Boons for Tokyo are its “healthy job growth and earnings growth, and companies there are actually increasing their spending and hiring people—and they have to put them somewhere.” That’s creating demand for office space, he says.
On the other end of the spectrum is London, bogged down by Brexit. Traditionally, says McKinley, “we think of the U.K. as a strong economic power, tied with New York, but Brexit has had a massive blow on the property market, which was already facing a decelerating cycle.”
The reason for that is “the great times of economic growth” for London had dissipated. At the same time, “a lot of supply had come in to that market,” he adds. Then Brexit happened and the office market “went from bad to worse. It’s the least healthy in the developed world right now.”
Tokyo and London show that the same property type can experience different cycles at the same time. This can even happen within a single region or country. “We’re seeing a bit of that in Canada,” says McKinley. “You have a very hot Toronto market contrasting with a very unhealthy Calgary market. But there are very few opportunities to play that.”
“We’re talking about one small city and one big city,” so it’s not as compelling, he says. Instead, investors should “open up your opportunity set to the world.”
Published at Thu, 23 Nov 2017 00:00:32 -0500