The bio
Name: Joseph Morris
Job: director – capital markets for Knight Frank
Years in the investment industry: 11
Based: Dubai
q What is the asset class and geography you are focused on?
a Commercial real estate; international.
What is the outlook for the month ahead?
There is certainly more positivity in the international commercial real estate markets at the start of this year compared to last. We see prime property in regional safe havens continuing to perform strongly, though [we] also see this as a year where key secondary markets will show positive performance. Europe continues to be a mixed bag, but we’ve seen some economies start to turn the corner, which will start to feed both the occupational and investor markets and undoubtedly breathe life into various property markets that have been muted for some time. Coupled with investors starting to look further up the risk curve for more yield, this should provide for an interesting short-term outlook. That said, we prefer to look towards years rather than months – we usually model real estate on a minimum three to five years hold period.
What are the main risks (either upside or downside) to the outlook?
Although perhaps not imminent, the spectre of rising interest rates continues to be a concern for many real estate investors. In countries like the United States and the United Kingdom they only really have one way to go and the yield gap between perceived risk-free income and property initial yields is starting to narrow [we saw a marked softening in government bonds in 2013], as is the spread between the total cost of debt and the running yield, both elements potentially affecting values. However, the differentials of both these metrics are currently higher than historic averages and therefore can withstand further contraction. Interest rates also generally rise when economies start to return to long-term trend growth and therefore at a time when we have historically seen rental growth, which should also relieve some of the pressure and provide the hedge against inflation that real estate investors seek.
What is the best investment at the moment?
At a high level, there are some global cities that we see performing well in terms of real estate capital value growth in 2014 – Tokyo, Sydney, Dubai and London among them. The office sector has led the recovery in most geographies to date, but I also really like the logistics sector, especially in the UK and Germany. As many retailers’ business models change to account for the growth of internet shopping, well located distribution centres become crucial, which underlines the investment rationale. I also like the healthcare sector in more developed economies – as the general population ages and we have a growing older demographic to care for, assets like nursing homes will start to become more and more important to the populace and will begin to attract major institutional investment, driving yields down and values up – something we are already starting to see in the UK.
What was the best investment you were involved in?
I specialised in central London investment when I was working in the UK some years ago. We worked on the acquisition of a prime property for a US opportunity fund for circa £200 million [Dh1.2 billion at current rates] with the plan to asset-manage and increase value over the medium term. However, purely due to a fast-growing market we were approached directly by another international fund and ended up selling the asset within a few months for substantially in excess of our initial acquisition price, returning significant equity multiples for the initial investor. However, results like this are generally driven more through luck than judgement.
What was the worst?
Thankfully I have not been involved in any terrible investment decisions in my professional career. However, in 2007 when we saw the credit markets grind to a halt in the UK there was a sharp correction to values and many debt-financed investors came into breach of their loan covenants and under pressure to recapitalise. Fortunately values in central London quickly rebounded, and are now generally in excess of their previous peak. In the UK regions and in continental Europe outside prime cities, it was a different story and has been a difficult few years. However, the tide seems to be turning – we have seen increased demand in these secondary markets as investors seek value plays, a trend that we envisage continuing.
* Lucy Barnard
