Signs of Life in the U.S. and Abroad

Jack Foster
Managing Director and Head of Global Real Estate
Franklin Templeton Real Estate Advisors

David Levy
Co-Portfolio Manager
Franklin Templeton Real Estate Advisors

As we examine both global macroeconomic trends in the first quarter of 2010 and analyze individual publicly traded real estate investment trusts (REITs), we continue to broadly favor REITs based in Asian countries, including Australia, over those based in the U.S., the UK and continental Europe. However, we also think there are a few U.S. sectors that have potential, and we are following them.

There are several reasons why Asian REIT markets now look like more compelling investment opportunities to us. The governments of China, Hong Kong, Singapore, Japan and Australia have lower budget deficits than their western counterparts. Asian economies generally were able to avert the worst problems associated with the global credit crunch due to swift government action and massive stimulus packages. In addition, many Asian countries are benefiting from higher economic growth than in the west. Australia was one of the few developed countries to avoid recession, and its economy continues to perform better than those of many other countries.

There are various REITs that have exposure in different Asian countries, but few offer a pure play on mainland China, where we believe the real estate market is relatively strong. Office space REIT Hongkong Land Holdings Limited has developed a few properties in the mainland. Another company that provides an opportunity to invest in China is Singapore-based CapitaMalls Asia, which is developing shopping centers in several Chinese secondary and tertiary cities.

The Japanese REIT (J-REIT) market is showing some signs of improvement as equity issuances increased and a major bond issuance was completed for the first time in close to two years.

In addition, merger and acquisition activity has picked up as there have been several planned mergers between public J-REITS, such as Nippon Residential Investment and Advance Residential Investment, as well as Tokyo Growth REIT and LCP REIT, to name a few that are scheduled to be completed within the first half of 2010.

In terms of sectors, we are starting to notice an earlier recovery in hotels, apartments and even storage in the U.S. market. Generally, the higher-quality companies (often, but not always, the larger capitalization companies) have resumed some outperformance so far in 2010, which had been the case historically, except for last year. As the economy begins to improve, hotels can often recover quickly since occupancy is typically very short term, compared to the five- to 10-year leases that new tenants would have to sign for space in office buildings or stores in shopping malls. U.S.-based Host Hotels & Resorts, with a portfolio of 110 luxury and upscale hotels, is a hotel operator we believe may benefit from a rebound in business travel, which we anticipate could be stronger than analysts' expectations for 2010.

In the apartment sector, which generally has one- to two-year leases, we like U.S.-based Equity Residential, which has a majority of its exposure in the stronger bi-coastal U.S. markets and is also expanding in a few of them. Within storage, we are monitoring U.S.-based Public Storage. While there is some longer-term occupancy in storage, the average length of stay is generally less than one year.

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