Market overview

Global REITs returned around 1.6% (US Dollar total return) for the second quarter of 2017. Middle East, Europe and Hong Kong were among the best performing countries, while the Japan, Australia and the US performed the worst. Industrial and Healthcare REITs performed the best while Retail and Office REITs underperformed. In Europe political risk has waned and the economic recovery is looking solid. With the better outlook for Europe, the ECB has signalled a less accommodative monetary policy stance but not yet tightening.
Portfolio review

The portfolio underperformed the benchmark for the second quarter of 2017 mainly due to stock selection in the US. The underperformance in the US emanates from overweight positions in Retail REITs such as Tanger Factory Outlet Centres, Taubman Centres and Simon Property Group. Storage REITs such as Life Storage and Public Storage also detracted from attribution. Poor performance from US retailers and the acquisition of Whole Foods by Amazon is indicative of the changing retail landscape. The strongest malls should be able to ultimately weather the storm but the current valuations and level of income growth is in question. Continental Europe had the best attribution with German residential again performing the best.

Outlook

The market may be behind the curve in discounting the end of the Quantitative Easing era and the impact of unwinding of central bank’s balance sheets on real estate and equity markets is up for debate. The expected returns for some other market sectors such as US banks, now fully recapitalized and a geared play on GDP growth look attractive relative to REITs which is late cycle. Assuming NAV estimates are accurate, valuations for global REITs still look reasonable, currently trading at a discount to Net Asset value of around 1.8% according to estimates from UBS Research. Dividends are expected to continue to grow over the next 12 months but at a slower pace of between 4 to 5%. The dividend yield for REITs in developed markets is currently around 4.3%.

Market overview

Global REITs returned around -5.1% (US Dollar total return) for the fourth quarter 2016, underperforming the global equity market significantly. Bond yields in developed markets moved higher sharply over the quarter, driving REITs lower. The surprise outcome of the US presidential election boosted inflation expectations and sentiment toward equities including REITs to some extent. Corecivic Inc, a speciality REIT which invests in private prisons, was the best performing stock (up more than 70%), driven by an expectation of a ‘higher demand for space’ after the Trump election win. REITs in North America and the UK outperformed while REITs Singapore and France performed the worst. German residential stocks, which are especially sensitive to higher bond yields in Germany, were among the worst performing stocks. Hotel and Speciality REITs outperformed for the quarter while Retail REITS underperformed. Net Operating Income growth for mall REITs in the US are slowing due to the challenging retail environment.

Portfolio review

The portfolio underperformed for the fourth quarter of 2016 mainly due to the overweight allocation to Germany, with exposure comprising mainly German residential property companies. The underweight allocation to the US was also not helpful, although mitigated to some extent by good stock selection. Simon Property Group, Deutche Wohnen AG, and Leg Immobelien AG made the worst contribution to relative return. Deutche Wohnen AG, which is expected to show strong growth over the next 12 months, are trading below fair value and the portfolio will remain overweight the stock.

Outlook

UBS research shows global REITs are trading at a slight premium to Net Asset Value and yield around 4.5% with distribution growth of around 6.4% expected for the next 12 months. Global REITs are facing a challenging next 12 months with elevated bond risk, political risk and possibly fundamentals peaking in a mature cycle. However, with a Loan to Value ratio of just under 40% for the group, the balance sheet is stronger than previous cycles. The big question is the direction of bond yields and whether Net Operating Income growth will be strong enough to offset higher financing cost.