Reflections on Growing Economies and Fading Stimulus

2018 Global Investment Outlook

Building a Positive 2018 Outlook for Real Estate and Infrastructure Dec 1, 2017

2018 Outlook: “Our outlook for real estate and infrastructure companies remains positive in many geographies and sectors around the world. As a result, we expect that generally positive earnings trends should support continued dividend growth and attractive long-term performance potential. Uncertainties related to political and policy changes, monetary policies and interest rates are unlikely to abate in 2018, but improving global economic conditions support positive demand trends for both real estate and infrastructure assets.”

Due to positive fundamental trends, we see opportunities in a number of real estate markets and property sectors. Specialty real estate is one segment with particularly strong growth trends due to continuing technological innovation and resulting demand. It includes data centers, biotechnology laboratory facilities and telecommunication towers. Within more traditional property sectors, we expect positive rental growth trends to continue in 2018 for office markets in Sydney, Tokyo and Stockholm, while Paris and Madrid have begun to see rents improve. Residential markets exhibiting strong or improving growth trends include German rental apartments, as well as for-sale residential property in Australia, Hong Kong, Singapore and the United States.

Challenges in Retail Property

Easily the most challenging area for property fundamentals is retail property. While growth remains moderately positive, online retailing is rapidly changing the way people shop and investors have reacted negatively to uncertainties related to the growing share garnered by e-commerce. As of November 2017, valuations for retail property companies generally appeared cheap but in some cases warranted, in our view. Retail property challenges, however, are leading to opportunities for modern logistics facilities that can accommodate increasing demand for the distribution needs of online retailers. Despite relatively higher levels of new industrial supply in many markets, demand has remained robust in most markets, including the United States, the United Kingdom and throughout the Asia-Pacific region.

Comparative Valuations

One area of significant potential opportunity for us is related to the valuation of property stocks relative to stocks more broadly and bonds. Due to positive earnings and dividend growth, US real estate investment trusts as of November 2017 generally were priced at levels we regarded as attractive relative to both 10-year US Treasuries and credit. Even more noteworthy, given the surging equity markets over the past year, was real estate’s valuation relative to global stocks. Compared to global equities (as measured by the MSCI World Index), global real estate (as measured by the FTSE EPRA/NAREIT Developed Index) in recent years has often traded at a premium multiple because of more predictable earnings. The multiple spread as of September 2017 indicated that global real estate stocks on average were trading over one standard deviation below their historical trend compared to global equities.

Relative Price-to-Earnings of Global Real Estate to Global Equities

Global Real Estate Pricing Below Trend
October 2012–September 2017

P/E Last 12 Months Spread to MSCI World Index


Source: FactSet. Data as of 9/30/17. Indexes are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at Past performance does not guarantee future results.

Opportunities in Environmental Infrastructure

Environmental concerns, along with their improving economic viability, suggest that renewable energy development should see potentially strong growth in 2018 and well beyond. Policy incentives and regulations support this trend throughout most of the world. The movement toward renewable power generation has significant implications for transmission and distribution grids, an area where there are also many opportunities. The digitization of grids is becoming increasingly important as power inputs evolve from traditional power plant hub and spoke directional transmission systems toward decentralized power inputs from multiple sources and directions. During 2017, events such as wildfires in California and several devastating hurricanes indicated the need for capital investment in “hardening” transmission and distribution grids.

A parallel trend toward cleaner carbon-based energy also supports a shift away from coal toward natural gas. As a result, we believe there are opportunities in a variety of areas, including gas utilities in the United States and China, as well as energy infrastructure in North America. Natural gas production in the United States has continued at peak levels, leading to positive growth trends for pipelines and liquid natural gas export facilities.

Prospects and Challenges in Transportation

Growth prospects for toll road operators have remained positive in a number of markets, including Australia, France, Canada and Brazil. Encouraging traffic growth trends on specific toll roads in these markets should support solid revenue growth. Marine ports are generally posting positive throughput growth, with China port throughput accelerating after a couple of years of decelerating growth, but so far the revenue impact has been more muted. Traffic growth for airports in Europe, Latin America and the Asia-Pacific region has been positive, but signs of deceleration are evident in some markets and trends for retail spending per passenger have not recovered as quickly as investors expected.

Power Generation

Challenges have continued for coal-based power generation in most markets, including Europe, the United States and China. While earnings and dividend growth for US electric utilities have continued at a stable mid-single digit pace, on average the group was trading at relatively high multiples as of November 2017 and might be vulnerable if long-term interest rates rise meaningfully.

Lessons from the Global Financial Crisis

Looking at the market on a longer-term basis, our investment experiences since the global financial crisis have caused us to re-emphasize the importance of adapting to change in order to maintain our edge as active investors. Changes in government policies and demographics, alongside technology innovations, are continually shifting the economic prospects of real estate and infrastructure businesses and leading to changing patterns of winners and losers. Few of us, regardless of tenure, could have anticipated this prolonged period of central bank interventions and the implications for long-term interest rates and asset class performance. Connected mobile devices have altered the landscape for real estate, creating challenges for retail properties, but also opportunities in data centers and logistics properties. Increased environmental awareness and technological innovations have altered societal views related to energy and created opportunities in renewables and the grids we rely on for our power. These macroeconomic themes flow into microeconomic themes for the companies in which we invest and remind us of the importance of vigilance and adaptation to changing circumstances.


Michael Hasenstab, Ph.D.

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Christopher J. Molumphy, CFA

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