This quarter the S&P Developed REIT Index posted its worst quarterly performance since 2011. REIT performance were largely dictated by falling bond prices in the US and Europe. The yield on 10 year US Treasury Notes increased more than 40 basis points over the quarter, sparked by concerns over perceived extreme valuations in global bond markets. The market also digested better economic data from the US, increasing the probability of an interest rate hike by the US Fed later this year. Listed property in the US and Europe performed the worst by far while listed property the UK, Singapore and Hong Kong performed the best. Only the UK showed positive performance for the quarter. A resurgence in the Greek sovereign debt crisis also added to the uncertainty although markets seemed to be less concerned about serious negative consequences for the regional economy this time round. Further policy easing in China also helped to boost sentiment for the Asia region.

The portfolio outperformed the benchmark during the quarter. The biggest contribution to portfolio relative return was from the underweight allocation in the US. The UK and Hong Kong also made a positive contribution mainly due to overweight allocation to these markets. The stocks with the best attribution were Hong Kong Land Holdings, Health Care REIT Inc and Global Logistic Properties. Japan and Europe were the biggest detractors to portfolio relative return. The stocks which showed the biggest negative attribution were Digital Realty Trust Inc, SL Green Realty and Prologis Inc.

Listed property will continue to benefit from modest global growth which will lead to higher rental growth and lower vacancies over time. According to UBS Research Global REITs traded at a 2.4 premium to NAV as at the end of June with an estimated dividend yield of 3.9% for 2015. Earnings growth twelve months forward of about 7.9% is expected. Again it needs to be emphasized that there is currently a strong correlation between listed property prices and bond prices. This correlation is currently much stronger than was historically the case with the result that changes in the long-end of the interest rate curve will impact listed property prices more, both on upward and downward moves. The expected increase in short-term interest rates should have a limited impact on property valuations and interest expense for REITS in the short-term. Furthermore indications are that any increase in interest rates will be modest and gradual over an extended period of time. There is still strong investment demand for institutional real estate in major global markets and this should provide support to property valuations.