By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
It is insane for sophisticated investors to put savings in illiquid, high risk, brick and mortar property in the GCC with volatile rental yields, rules biased in favour of developers, exorbitant service charges, excessive mortgage cost and shrinking high end expat populations in times of recession. This is the lesson learnt the hard way by investors in the GCC property markets, where 40 – 60% drawdowns in a bear market have happened twice in the past decade. I have lived (and survived!) the property market roller coaster and liquidity shocks in the Gulf in 2009-10 and since 2014 by adhering strictly to J.P. Morgan’s advice. Liquidity is like a cab on a rainy night in New York. It disappears when you need it the most.
While capital values, rental yields continue to plunge in the UAE, 2018 was a wonderful time to invest in the world’s best managed, most profitable, most liquid real estate investment trusts (REIT’s) listed on the New York Stock Exchange.
The bellwether FTSE Nareit All Equity REIT index is up 19% in 2018 alone and my must own data center/commercial/logistics property stocks are up 25 – 35% in the past year, at a time when illiquid brick and mortar property in Dubai lost another 15% even as rentals fell but service charges continued to rise. Why did I recommend committing savings to REIT’s on the NYSE since last summer? Four reasons.
One, the yield on the ten-year US Treasury bond plunged from 3.25% last September to 2.50% now, making 5% dividend yields of my chosen REIT’s a no brainer buy me.
Two, REIT’s traditionally outperform the S&P 500 index when the US Treasury bond yield curve flattens and inverts, as it did in 2019. Voila! Real estate investment trusts have outperformed the S&P 500 index by 300 basis points in 2019. Mark Twain was right. In the financial markets, history does not repeat itself but it surely rhymes.
Three, while a REIT in the Dubai Financial Market barely trades USD 100,000 a day, major US REITs can well trade $80 – 300 million on the NYSE. The risk and liquidity premium in illiquid property markets rises exponentially when the Big Grizzly hits rental/capital values. This is what is happening across the Gulf.
Four, only the US has high growth REITs that can enable investors to capitalize in the hottest segments of real estate – data centers/e-commerce logistics, bio-sciences, prisons (no occupancy ratio angst with Club Fed inmates!), Pentagon housing etc. These fabulous opportunities only exist in Wall Street, the financial hub of a $20 trillion economy, the world’s safest, finest, best regulated investment destination. Uncle/Ammi/Tio Sam, I love you. The US President whose tax cuts coincided with a spectacular bull market in real estate trusts. Go The Donald!
Industrial REIT’s have been one of my top sector ideas and these puppies are up 20% in the past four months. I have made no secret of my admiration for Prologis, the world’s largest warehouse, distribution center and logistics space, with a 38% total return in the past two years. With a global footprint and 780 million square feet of prime industrial property, Prologis is a must own for any real estate investor with half a brain. It is leveraged to the viral, exponential curve economics of E-commerce. It has both scale and pricing power in the US, Europe and Asia. Yet it is still at an early stage in its growth trajectory even now two decades after the Amazon IPO. After all, E-commerce is only 20% of long-life industrial leases at Prologis and online retail sales growth is an annual 15%. Prologis is the jewel in the crown of industrial REIT’s. That much, at least, is certain.
Prologis is up 28% in the past year and the distribution of yield has now compressed to my target of 2%, while the valuation multiple is above 22 times funds from operations (FFO), so I would only commit new money at 64 for a 90 target. Dumb money buys brick and mortar warehouses in a recession and hopes they will come. Smart money buys Prologis on Wall Street.