In our monthly series featuring leading financial experts and fund managers, Mr Matthew Kaiser, managing director and portfolio manager at Goldman Sachs Asset Management, looks at the American property market.
The United States property market is the next thing that investors should keep their eye on, says one leading real estate expert.
Mr Matthew Kaiser, managing director and portfolio manager at Goldman Sachs Asset Management, told The Sunday Times: "Real estate markets have largely healed from the damage done during the housing bubble and commercial property bubble of 2005-07. We see fundamentals in these markets nationally as being quite good."
The asset manager recently announced that the multi-asset Goldman Sachs US Real Estate Balance Portfolio fund is available in Singapore.
Set up in 2012, it has a three-year annualised return of 5.47 per cent. It aims to provide exposure to US property markets by investing mainly in fixed-income securities, which make up 70 per cent, with equities accounting for 30 per cent.
This should appeal to those who would rather invest in the recovering US property market via a fund than by buying property there.
Mr Kaiser, who has more than 25 years of experience in US fixed-income markets, has been with Goldman for seven years.
He joined the firm to work with the US Federal Reserve in 2009, when the Fed started buying mortgage bonds as part of its first round of quantitative easing, a move aimed at bolstering the housing market. Goldman was among the managers that ran the plan.
Mr Kaiser describes the outlook for the US economy as constructive, saying it has been growing between 2 per cent and 2.5 per cent a year.
"Importantly, the labour market remains quite strong, unemployment is down to 5 per cent, and that's certainly been a goal of the Fed and its policy, in terms of getting the economy to move again."
He said these and other positive factors such as stronger home and equity prices in the past few years have been big drivers in improving consumer finances.
"That has positive implications for residential property markets as consumer confidence and incomes improve - they are more likely to move out of their parents' homes or buy their first home," he said
Q How has the property market in the US changed since the subprime mortgage crisis there and the global financial meltdown?
A The overall stock of residential homes remains quite modest, which we think is a great opportunity for home building.
Demand for rental property has been increasing, and we've seen builders respond to that, through the delivery of more apartments and what we call multi-family properties - which are buildings that might have anywhere from four to 20 or 40 residences.
Those two sectors offer some of the best opportunities.
There are areas in the commercial property market that also appear attractive, although certain markets like New York and San Francisco are beginning to show signs of elevated price levels.
Q Why are things looking good for the US residential market?
A There's a very modest level of supply, population growth has been getting stronger, which implies demand for residences should get better, and there's very little excess supply in most regional markets.
So the outlook for building and construction might be the best in the single-family and condominium markets.
The delivery of more apartment and multi-family properties has been going on for the better part of the past two years, and we're starting to see more balance there - between demand for rentals and actual supply of rentals.
Household growth is directly linked to the improvement in the economy.
For example, there are kids who have been living with their parents for some time, waiting for the economy to create jobs, and when they get jobs, they move out and create households of their own.
They typically go for rentals at first, until they accumulate enough savings to buy a property. That's what we're starting to see now as the economy begins to improve.
Q What are some unique aspects of the US real estate market?
A There are arguments to be made that some people will become renters who would also have purchased a home. But in our view, it's still too early to make that judgment.
We expect that the creation of families and family units will ultimately lead to the purchase of family homes. That's a trend we expect to be very durable, and it's one of the interesting aspects of the US real estate market right now.
It appears to have early-cycle characteristics, as compared with other markets that appear to be late-cycle.
For example, the challenges that we see in global energy markets today look remarkably like late-cycle characteristics.
There was an enormous increase in supply as price levels went higher, as we saw energy prices move to US$100 a barrel; there was enormous leverage created in the system that led to tremendous oversupply, which caused a significant price correction. We expect a multi-year period of resolution.
That sounds remarkably like the US housing market in 2006-08.
Q In what ways would the Goldman Sachs US Real Estate Balance Portfolio fund interest investors?
A It has a mix of shares in real estate companies, and bonds that are influenced by real estate markets. We don't own direct property in the fund.
The ownership of shares and bonds allows us to deliver a daily liquidity fund solution, which would be almost impossible to do if we were investing in direct real estate.
The mix of assets also creates a return profile that's similar to what you'd get if you bought an investment property.
It's different from most real estate offerings, which tend to focus on real estate investment trusts (Reits) specifically.
The fund also has flexibility in terms of the equities and bonds we can buy, which gives the management team the ability to take advantage of changes in market conditions in different parts of the real estate market.
For instance, we might own shares in home builders, which we do now, which have been an important part of the fund's success so far, or in building materials companies, or in companies geared towards home renovation, which is another important area of growth in the US now.
Or even bank shares, as banks have exposure to US real estate in a number of ways, which can be an interesting way of getting real estate exposure into the portfolio.
Q What are some of the risks that investors should take note of?
A If the overall economy went into recession, that would affect consumers' wages and their ability to move out of the home.
There is some exposure to interest rates, as they are a factor in the affordability of both housing and commercial property, and the overall level of supply is another important consideration.
What the fund doesn't have is a significant exposure to the export sector. Most of the companies in the bonds we're buying are domestically focused, so changes in the value of the US dollar or global energy prices would typically have less of an impact on our fund.
In terms of Fed policy and interest rate policy, the cost of borrowing is an important factor in demand for housing.
The good news is, the Fed has been quite clear that it is going to be patient in raising interest rates in the face of global risks. So the risk of higher mortgage and borrowing rates is fairly low in the short run.
More importantly, demand for housing and rental property is driven much more by overall economic activity levels than by interest rates.
A version of this article appeared in the print edition of The Sunday Times on May 22, 2016, with the headline 'US property market 'looking good''. Print Edition | Subscribe
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