Market overview

After a volatile start to the year, REITs in developed markets rallied more than 15% from the lows in the quarter after global sentiment changed in the middle of February and credit spreads tightened back to levels seen at the end of 2015. REITs in developed markets returned about 6.7% total return in USD (1.2 % in ZAR) for the first quarter of 2016. The best performing regions was Canada, Japan and Australia. The UK performed the worst, weighed down by uncertainty around the outcome of the EU referendum to be held later this year. Hong Kong REITs staged a strong rally in March after a reprieve from the US Fed pushing out further rate hikes in the US. Retail sales in Hong Kong remains weak and economic growth is expected to slow. The Singapore office market is still under pressure from weak demand and expected new supply. In the US, the office sector was the worst performing due to perceived concerns around the New York City office market and specialty sectors such as data centers, storage and student housing outperformed. Japan listed property performed very well after unexpected quantitative easing by the Bank of Japan. Listed property in all the regions outperformed their respective domestic equity markets, except for Hong Kong and the UK.

Portfolio overview

The global property portfolio underperformed the benchmark during the quarter. The US had the biggest negative attribution, mostly due to the overweight position in SL Green Realty Corp, which has big exposure to the New York City office market, and the underweight position in Realty Income Corp. The overweight allocation to the UK also detracted from portfolio relative return. The portfolio will remain overweight to the New York Office market as there is no solid evidence yet of an entrenched slowdown in that market.

Outlook

Overall property fundamentals in the US and UK is still good, underpinned by healthy demand and manageable new supply across sectors. There is a risk that the UK will vote to exit the European Union which could cause severe volatility for the region. A UK exit is not the most likely outcome and UK REITs can be expected to re-rate strongly after the vote, all else remaining equal. Higher interest rates may negatively impact the ability of commercial real estate owners to roll-over maturing debt. Elevated levels of commercial mortgage debt will mature in 2016 and 2017 in the US. Property values in general may be re-priced lower if the availability of debt decrease. Listed REITs have better access to capital and a bias to better quality assets but will not be immune to any debt induced volatility. According to UBS Research global REITs are currently trading at 7% premium to NA

Fund Overview

The fund delivered a gross total return of 16.59% marginally underperforming the benchmark's 16.84% in the 4th quarter. This was partly due to cash dilution as fund continued to receive huge inflows in a rising market. However, for the year the fund outperformed the benchmark by over 4% on a gross total return basis. The biggest contributors in the to performance for the quarter were our overweight positions in the self-storage sector in the US with holdings such as Public Storage, Sovran Self Storage and Extra Space Storage. Apart from cash, the detractors to performance were our underweight position in Digital Realty (USA) and overweight positions in Nippon Building (Japan) and Vonovia Se (Germany).

Market Overview

The best performing markets for the quarter were the US and Australia. The UK and Japan were the worst performing markets. Property stocks performed better than equities for the 2015 calendar year in Australia, UK, Canada, Singapore, Hong Kong and Europe. However, listed property underperformed equities in the US and Japan.

Property fundamentals remained fairly strong across most regions. The positive rental growth trend continued. The industrial and logistics sectors continue to be supported by the growth in ecommerce. Vacancies have been declined across most sectors and regions. This, together with limited supply of properties, has helped to support rental growth. The UK office market experienced strong rental growth in the region of 10% and the outlook remains positive. German residential, where the fund has taken a large overweight position, remained robust. The Australian property market continues to do well despite a challenging commodities market. There has been a lot of money, particularly Asian, chasing Australian properties. The US appears to be the strongest market at the moment and the fund has been gradually increasing its exposure. Hong Kong's retail sector is under pressure due to the slowdown in the Chinese economy.

Outlook

We are forecasting USD earnings growth of about 8% for 2015 and the global listed property universe is offering a forward yield of about 4.5%. Listed property is trading at a discount to net asset value of about 5%. Property fundamentals remain fairly strong across most markets and sectors. However, we could see market volatility largely driven by the uncertainty in global markets and the US Fed rate hikes.