Capital value and currency swings produce contrasting global returns, says IPD

The local currencies spread of movement in underlying capital values across 23 of the world’s most mature real estate markets was, through 2008, 42 percentage points from best to worst, according to IPD Global Property Index. Despite some severe capital falls, the estimated size of the professionally
managed global real estate investment market still topped the $4.6tn (€3.3tn) mark.

At the two extremes were Ireland, at -37.2%, and South Africa which produced +4.4%, this positive capital growth albeit reflecting domestic inflation of 11.5%. While three national real estate markets produced a positive capital return over last year, all markets suffered significant reductions on the previous year.

Increases in property yields across world real estate markets were at significantly different paces, due to the pattern of yield compression prior to the tipping points, following the summer of 2007; the level of capital flows into different property markets before the crisis; and national variations in the supply of and demand for assets. For many cross-border real estate investors in 2008, however, possibly the most crucial factor driving overall returns was the dramatic pattern of cross-currency movements.

According to the Global Index, the 2008 total return in US dollars was -10.1%, reflecting a -14.7% capital return partially offset by a stable income return of 5.4%. The spread of returns on a US dollar basis was far more substantial than local currency capital movement spreads – at more than 64 percentage points. Given the profoundly weakened sterling against both the euro and to a lesser extent the US dollar last year, the UK overtakes Ireland as the weakest national market on a dollar return basis, at
-43.7%, while the strongest performer was Japan, at 22.9%, due to the yen strengthening considerably against the dollar.

Annualised total returns in dollar terms over three, five and eight years – the full span of the Global Index’s historic time series data – is 7.9%, 8.9% and 10.3%, respectively.

Ian Cullen, IPD’s co-founding director said: “In a year of globally synchronised economic recession, it is not surprising that IPD’s Global Property Index breaks records in the sharpness and scale of the correction in investment property prices recorded. Perhaps less keenly anticipated was the spread across the 23 constituent markets, with double figure declines in the US and UK diluted by much more muted or delayed responses in the other three biggest markets – Japan, Germany and France.”

The dollar returns to each of the main sectors in 2008 were as follows:

This is the second IPD Global Property Index – published at the IPD European Property Investment Conference 2008 in Barcelona – but is the first in the annual series which includes consistent data from the United States following the inclusion of the IPD US Annual Property Index launched in New York on May 27th . The first ‘fully global index enables cross border real estate investors, for the first time, to measure
the performance of international property on a like-for-like basis.

IPD estimates the size of each national property investment market by identifying and aggregating the best available approximation of the unleveraged total value of each of the professionally managed direct real estate portfolios invested in each market.

The IPD Global Property Index database is comprised of more than 50,000 assets worth $1.1 trillion as at the end of December 2008.