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24 February 2012: SH: European real estate – where are the risks?

In this article, we would like to consider the renewed flight to quality which has been triggered by the sovereign debt crisis and examine the merits of investing in haven locations and in corporate bond-type properties with very secure income streams….  

Neil Turner, Head of Property Fund Management; Mark Callender, Head of Property Research

    For professional investors and advisers only.This document is not suitable for retail

    Unsurprisingly, the uncertainty caused by the sovereign debt crisis, the potential damage to Europe’s banking system and the knock-on effects on corporate earnings has led to a renewed flight to safety in the investment world. As this article is being written, US 10-year treasuries, UK 10-year Gilts and German 10-year bunds are all trading at either record low yields or at levels not seen for over 100 years. Equities, on the other hand, are valued off relatively low multiples with dividend yields generally offering more income than government securities.

    Further, within the asset classes themselves, there are increasing differentials between those parts of the market that are perceived as risky and those that are not. So within fixed income, those governments that have managed to hold on to their AAA status (and the US) can issue bonds at very low yields, whilst corporate bonds – particularly in high yield space – trade at a much higher spread than is normally the case. Within equities, although emerging markets are always perceived to be higher risk than their developed brethren, the former are also clearly discounted relative to the latter according to current valuations.

    Within the real estate investment market, we are witnessing a similar arrangement take shape. Firstly, certain locations are enjoying a haven status and are attracting huge amounts of capital – for example, central London, Munich, Paris and Switzerland. Some of these markets are now trading at valuations that have never been seen before. We look at one example and question whether buying real estate at these prices is as risk free as some investors believe. Alternatively, and in many other  locations, investors are focusing on corporate bond-type properties with very secure income streams. These assets may not represent good quality real estate, but they are priced aggressively since much of the capital market is presently obsessed with income security. We again question whether investing in this type of real estate is actually a high risk strategy.

    The views and opinions contained herein are those of the Kevin Murphy and Nick Kirrage, Specialist Value UK Equity Fund managers and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

    For professional investors and advisers only.This document is not suitable for retail clients.

    This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority. For your security, communications may be taped or monitored.

     Source: IFAWorld – Schroders

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