Last year was very positive in terms of total returns — the global real estate securities market was up nearly 29%.

Two factors drove this very strong performance:

• Low interest rates around the world
• Demand generally exceeding very low levels of supply across developed markets

Last year also saw positive economic growth and recovery from many of the macroeconomic shocks we witnessed during the past several years. As a result, the market has taken a more sanguine view toward risk and a more optimistic view toward commercial real estate fundamentals.

Our strategies: fourth-quarter review

As fundamental real estate managers, we think stock selection — rather than country or currency weights — offers the best opportunity to add value. As a result, we don't weight our portfolios according to macro issues or government or central bank policy.

We manage three distinct real estate securities strategies. Two of our strategies have a total return objective: One invests predominately in US equity REITs and the other in global real estate equities. Our third strategy has a primary objective of income and invests across the real estate capital structure, in real estate equities and real estate fixed income securities, on a global basis.

Our total return US and global real estate strategies had competitive returns for the year, while our global income strategy lagged global real estate securities as a whole, as measured by the FTSE EPRA/NAREIT Developed Index. But the strategy benefited from improving commercial real estate fundamentals and strong equity market returns. On the fixed income side, spreads continued to tighten, which generally helped performance.

Exposure to US apartments generally hurt performance relative to our benchmarks during the year. As money moved out of apartments and into homebuilding and timber products, those companies had stronger performance than we estimated. We remained optimistic about the long-term fundamentals in apartments, and their valuations remain very attractive on a relative basis.

As commercial real estate fundamentals continue to improve, we believe companies with the better business plans and strategies will be rewarded for consistently beating earnings and raising NAV estimates. In our opinion, that's a self-reinforcing process that raises valuations of these companies over time.

With the strong performance around the globe, the substantial discounts to net asset value (NAV) we saw in many countries have dissipated to a degree. But because current valuations are reasonable, and there is generally a lack of new supply coming to market, we're optimistic about long-term outperformance.

Our outlook

Countries with the strongest one-year projections for growth include Hong Kong with 15%, the US with 10% and Singapore with 9%.¹ In the US, three factors are driving the robust projection, including:

• Internal growth that results from improvements in occupancy rates and improvements in rents.
• External growth from companies able to buy assets to increase their earnings by accretion.
• Refinancing at low interest rates helps companies lower costs and ultimately improve earnings. Because many REITs have taken advantage of the low interest during the last couple years, we anticipate the impact will not be as significant going forward, but still positive.

The sector in the US with the strongest growth expectation is apartments, while neighborhood shopping centers are at the lower end of our growth expectations because, although the sector is stable, we don't expect it to generate significantly high internal growth. The office sector will continue to struggle without strong job growth, which many markets need to generate improvement in rent and occupancy rates.

Consensus estimates peg growth of the US gross domestic product for 2013 at about 2%, so we don't have tremendous expectations for the US economy. But low interest rates and relatively low levels of new construction set up an environment for fairly attractive commercial real estate fundamentals.

When we look at these markets in terms of how they cycle, most of them are still experiencing positive rental growth. So that means rising cash flows and dividends. We believe this real estate cycle is longer than usual because the supply response isn't happening as early as it has during previous cycles. Our view remains unchanged, but we're not complacent. We continue to monitor fundamentals very closely and watch for signs of overbuilding or macroeconomic shocks, such as the one we're potentially facing in the US with the debt ceiling. While it appears these macro shocks have had less impact on the market over time, we remain mindful of the risk and continue to monitor the situation closely.

The opinions expressed are those of the author, are based on current market conditions as of January 2013 and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

This does not constitute a recommendation of the suitability of any investment strategy for a particular investor.

The investment techniques and risk analysis used by the strategy may not produce the desired results.

Past performance cannot guarantee comparable future results.

The FTSE EPRA/NAREIT Developed Real Estate Index is an unmanaged index considered representative of global real estate companies and REITs. An investment cannot be made directly in an index.

Invesco Advisers, Inc. is an investment advisor; it provides investment advisory services to individual and institutional clients and does not sell securities. Invesco Distributors, Inc. is the US distributor for Invesco's retail products. Each entity is a wholly owned, indirect subsidiary of Invesco Ltd.

Data as of Dec. 31, 2012, unless otherwise stated.