Simon Pearse, MD of Marriott Asset Management, says there is no better time for South Africans to diversify into international real estate.
'Global equities are being punished as the US economy slows and the equity, bond and cash investments that investors traditionally use to diversify their offshore investments are not yielding the returns they expect.
'By contrast, the income yield for international real estate is at 6%, which exceeds the yields on bonds and cash.'
Pearse says unlike bonds or other interest-bearing investments, international real estate offers investors a growing income due to rental escalation from the underlying properties. As rental agreements include escalation clauses that ensure rental returns keep up with inflation, this growth is inflation-hedged.
However, growth of 5% to 7% is forecast for listed property for the next two years, which is around twice that of international inflation at 2,6%, making it even more attractive proposition.
'US real estate is offering exceptional value relative to US equities. This is evident in the fact that the US real estate price to earnings ratio (p:e) relative to the S&P 500 p:e ratio is at a 35% discount to the 14-year average.'
International real estate is where local real estate was three years ago when listed property enjoyed high yields and good income growth based on escalating rentals, he says.
Listed real estate experiences cycles during which the listed company value trades at a premium or a discount to the net asset value (NAV) of the underlying properties.
'The real estate sector in the US is trading at a discount to NAV of around 10% when historically, it has traded at a premium of about 5% to the value of the underlying property,' says Pearse.
'What this means is that one can expect fortuitous capital gain over and above the capital growth that is enjoyed as a result of income growth.'
While an offshore investment offers South Africans currency diversification, a listed real Pearse says one way to assess the risk is to look at how closely the asset class correlates to other asset classes. For real estate, it correlates poorly to equities and bonds.
When equities are doing badly, real estate performs well. For quite some time now, real estate has been negatively correlated to the Nasdaq.
'Thus, SA investors should consider international real estate as an option for their offshore investments,' Pearse says