Zurich, 8 May 2013Research Monthly
2declined from close to 6.5% in 2008 to about 3.5%. Elevatedunemployment remains a drag. However, labor market condi-tions are slowly improving, and our economists expect growthin the US to re-accelerate later in the year. Overall, we there-fore believe that the housing market recovery will continue inH2 2013. And if there is a temporary weakening, the medium-term downside potential is very much limited at current levels,in our view.
Commercial property: Attractive yields, rents bottom out
Investment demand for US direct commercial property wasrobust in Q1 2013. The first quarter's transaction volume in-creased by 35% YoY to about USD 72.8 bn, according toRCA, a research company. This represents the second highestquarterly volume since the financial crisis. The NCREIF indicesfor direct market performance have remained solidly positive,and rental yields have been fairly stable at attractive levels inthe first few months of the year. US office properties returnedabout 1.9%, apartments around 2.6%, industrial propertiesapproximately 2.5% and retail properties close to 3.7% in Q12013. At 6%, the average rental yield on prime offices or apartments is still around 400 basis points higher than theyield on 10-year US government bonds. Spreads are evenhigher for suburban office, industrial and retail properties (seeFigure 3). Prime office yields differ regionally between 4.5%(New York, San Francisco) and 6.7% (Atlanta, Miami). Theinterest rate environment will likely remain accommodative for the time being. Our economists expect the Federal Reserve toleave interest rates at near zero over at least a 12-month hori-zon. US commercial real estate should therefore continue toattract investors looking for yield, and we could see modestyield compression in the next few months, also in the primesegment.In addition, rental incomes bottomed out in all sectors (seeFigure 7), and vacancies peaked. According to research com-pany R.E.I.S., average rents gained 3% YoY in the US apart-ment sector, 2% YoY in the office sector and a modest 0.7%YoY in the retail real estate sector in Q1 2013. Going forward, we expect the rental performance ranking to reverse, withretail properties slightly outperforming, and the apartment sec-tor slightly underperforming. Retail rental markets should startbenefiting from the healthier balance sheets of domestic con-sumers. US households have de-leveraged quite a lot in recentyears (partly through defaulting on mortgages), and are now inthe position to expand spending levels more strongly again ifeconomic conditions improve. The upside for rents in theapartment sector, on the other hand, will likely be limited bythe recovery in homebuyer demand. Buying a home is a sub-stitute for renting a home.
Listed real estate: Still upside despite richer valuations
In terms of listed real estate side, we recommended real es-tate investment trusts (REITs) to gain exposure to the com-mercial real estate sector, and homebuilder stocks to benefitfrom the housing market recovery. In absolute terms, USREITs and homebuilders have performed very strongly sinceinception of the investment idea on 27 November, partly bene-fiting from the overall equity market rally. As of 7 May 2013,US REITs had increased by about 20.7%, which is slightlymore than the MSCI World Index (see Figure 1). US home-builder stocks increased by about 24.1% over that period,outperforming the MSCI World by 5.7%. However, home-builder stocks have also been far more volatile than REITs andthe overall stock market, indicating higher risk. Given currentvaluations and the risk profile, we currently slightly prefer USREITs to homebuilder stocks. But, strategically, homebuildersalso have upside potential, in our view. US REITs offer appeal-ing dividend yields of around 3.8% on average, and dividendsshould be sustainable, given that rental markets are at cyclicallows and there is potential for further financing cost reduc-tions.
Gradual homebuilding recovery likely to continue US commercial real estate yields offer attractive spread
Datastream, Credit Suisse
RCA, Bloomberg, Credit Suisse
US housing startsNew housing building permits
'000 units (SAAR)
135791101030507091113Office - CBDOffice - SuburbanRetailApartmentsIndustrial US 10-year government bonds Average rental yield, %