Shelter from the Storm

The global economy is now in the middle of a "perfect storm". Financial markets and economies around the world are facing a major credit crisis and increasing economic malaise, while significant inflation, which we have not seen in many years, continues to cause concern. We believe real estate is well positioned to weather this storm, and may indeed be a place to hide from the worst of the volatility.

With the credit crisis, the significant decline in securitization has meant banks are unable to securitize their debt and are therefore unable to lend. In real estate, this means that there is no new construction because there is no financing for it. Currently, supply and demand for commercial real estate is in balance, but as we gradually move out of this environment of economic malaise, demand for real estate is likely to increase without a corresponding increase in supply, which means commercial real estate will probably do reasonably well. Real estate is also a good inflation hedge-it is relatively quick to keep up with rising inflation compared to many other asset classes, since most properties can raise rents over time.

As negative headlines on the housing crisis continue to attract attention, it is important to recognize that they mostly pertain to residential housing, while our investments are primarily in commercial real estate. The fundamentals of most office markets are very stable. Leases are generally longer term (about five to 10 years), occupancy rates have still not significantly declined, and rental rates have not yet fallen to negative levels. Although markets are weakening, we believe this sector is a very good value play, since, unlike the dot-com era, financial companies are not selling a lot of real estate but seem to be readying for a recovery.

Our strategy strongly emphasizes dividends, concentrating on investments in high-quality companies with high yields, low volatility, and strong and stable cash flows. We are finding high-yielding opportunities in Australia, as well as attractively valued high-quality U.S. names, including Vornado Realty Trust and Boston Properties, two of the largest U.S. office REITs.

Our investments are largely in very high-quality names that have significant holdings in prime areas and are among the top in their space, with excellent management teams, high-quality assets, stronger rents than the overall market, and pristine balance sheets.

Although we focus on defensive large-cap names, we are not afraid to buy stocks that have been beaten down through panic selling. We intend to have a very active approach in this volatile market, which we believe should enable our portfolios to weather the storm.

Please click for more information on the following funds:
FTIF - Franklin Global Real Estate (Euro) Fund
FTIF - Franklin Global Real Estate (USD) Fund