The dawn of the post-credit crisis era has finally arrived. Business and consumer confidence has improved, job growth exceeded expectations, and with it, tenant demand for real estate has increased. Notwithstanding inevitable fluctuations in economic data, the weight of indicators now clearly shows that the U.S. economy is building sufficient momentum for a sustainable expansion. Our forecast calls for stronger and broader economic and employment growth in 2014 and beyond. As a result, we expect real estate returns to be driven more by strengthening property fundamentals and less by cap rate compression in the coming years, especially in light of already low cap rates and slowly rising interest rates. These returns will remain attractive, particularly relative to fixed-income investments.
As introduced in our last U.S. Real Estate Strategic Outlook, we recommend investors give greater weight to assets, markets, and sectors that offer greater potential for income growth to offset capital value risks. Accordingly, our recommended allocations are now firmly more focused on the pro-cyclical sectors (industrial and office) at the expense of the more countercyclical sectors (apartments and retail). Relative to the investable universe as represented by the NCREIF Property Index (NPI), we maintain a strong overweight to industrial, though we have tilted slightly more to office than before to capture the expected improvement in office market conditions. Overall, we maintain a slight underweight to apartments, office, and retail.
Source : Deutsche Asset & Wealth Management