Janus' Patrick Brophy on Real Estate Trends: The Weekend Interview

First, in commercial real estate, you're sort of the landlord to the global economy, so if higher oil prices slowglobal growth, real estate fundamentals will be negatively impacted. 

Second, commodity costs are important as we consider replacement costs for buildings – cement, copper and these types of inputs. As these costs go up, development  becomes less economically  feasible, which clearly hurts developers but actually helps existing landlords by providing further supply constraints. 

In developed markets, declining labor costs have helped offset some of the rise in commodity prices. If inflation pressures creep into the labor market,you'd get the full whammy of higher prices on all of your development inputs.

We expect this year to be more difficult in the developed markets, although thatis not the way it has started. So far , the developed markets are out performing emerging markets. Real estate has not been spared and has followed the market on that front.

We do think that the capitalization, or cap-rate, compression story  has largely played out in most developed markets, which means we're going to need a sustainable recovery  in fundamentals to drive growth  from here.  As investors' attention shifts more to fundamentals, we think the emerging markets will start to look more interesting.

Q. When do you expect to focus more of your investments toward emerging markets?

The fund tracks the FTSE EPRA NAREIT Global Index, and the developing, or emerging, markets are a small but growing component of that index. We have our investment in the emerging markets capped at 20% of the portfolio, which is more than double the level of the index.

We expect our investments in this area will increase gradually over time, and  right now it's where we are really starting to  find opportunities, particularly after the recent correction.

Geographically, our breakdown is North America, 64%; Asia/Pacific ex-Japan, 20%; Europe, 9%, Latin America, 4%; and Japan, 3%.

We might look underweight in, say, China. But many of our Chinese real-estate investments are actually listed in the Cayman Islands, so they show up as North American holdings. Also, we are overweight in Singapore, which gives us an anchor in the area on which we can piggy back our way more into China. This is a more conservative way to invest in China's rapid growth.

Of the emerging markets, Brazil has been a our largest investment. We believe its shopping-center owners have benefited from solid growth in retail sales, a byproduct of the rising consumer class; and its homebuilders continue to execute well, taking advantage of strong secular demand trends and extensive government-sponsored efforts to promote homeownership.

It's true that we've been significantly overweight in the U.S. for the past two years, but this level should be coming down. There are now better opportunities elsewhere. This is really an interesting time for the real-estate space, which is still in its infancy in many respects, especially in the emerging markets.