The US has benefited from improving property prices and sales volumes, falling vacancy rates and low mortgage rates. We anticipate that the next phase for US real estate markets will be marked by growing household formation rates and a notable increase in construction activity, supported by three factors:
In recent years, residential supply has not kept up with household formation. This fundamental supply-demand mismatch provides a strong support for further construction and home price gains. The long-term average of new single-family housing starts is approximately 1.0 million units per year, and current levels are near 0.75 million*. We believe there is room for additional improvement relative to long-term trends.
Employment and wages have recorded solid growth and should continue to improve. In our view, this will create additional demand for housing as more millennials are poised to leave the nest.
The real estate cycle as a whole remains firmly in its expansion stage. Residential investment is rising towards its traditional share of the US economy, driving our belief that the market still has room to run.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.
The Goldman Sachs US Real Estate Balanced Portfolio provides exposure to improvements in US real estate markets and potential diversification benefits through a balanced and flexible investment approach.
Capitalize on the sustained improvements in the US real estate market through a diversified pool of real estate related securities in fixed income and equity.
Seek to maximize total return via a combination of both appreciation- and income-oriented securities.
Adapt quickly to market changes and seize opportunities through flexible asset allocation.
Profit from emerging opportunities while realizing lower volatility with active management approach. Since inception, the Portfolio has delivered strong risk-adjusted returns, returning 6.57% with a Sharpe Ratio** of 0.94%.
This month, we discuss why we think the US real estate remains in expansionary phase and the investment implications.
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Exchange Rate Risk – Changes in exchange rates may reduce or increase the returns an investor might expect to receive independent of the performance of such assets. If applicable, investment techniques used to attempt to reduce the risk of currency movements (hedging), may not be effective. Hedging also involves additional risks associated with derivatives.
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Interest Rate Risk – When interest rates rise, bond prices fall, reflecting the ability of investors to obtain a more attractive rate of interest on their money elsewhere. Bond prices are therefore subject to movements in interest rates which may move for a number of reasons, political as well as economic.
High Yield Risk – High-yield instruments, meaning investments which pay a high amount of income generally involve greater credit risk and sensitivity to economic developments, giving rise to greater price movement than lower yielding instruments.
Real Estate Risk – The Portfolio primarily invests in a very specific sector of the economy which can be particularly exposed to a downturn in macro-economic conditions or particular conditions affecting the property market.
Volatility Risk – An investment in the Portfolio can expose investors to higher volatility levels than is normally associated with “balanced” investment strategies, therefore the value of their investment may be subject to significant changes in the short term.
Mortgage-Backed Securities (“MBS”) Risk – The mortgages backing MBS may be repaid earlier than required, resulting in a lower return.
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