Fund review

Following a negative 2Q 2019 performance of -3.1%, the fund delivered a positive 12.7% total return in ZAR for the third quarter. This compared with a ZAR benchmark return of 13.9%. This quarter, the strong return was driven primarily by ZAR weakness (ZAR down 8.4% vs US USD), supplemented by share price performance of 4.3%.

Our overweight positions in US residential (Equity Residential and Essex Property), and Japanese industrial specialists (GLP and Nippon Prologis) demonstrate the outperformance generated by the fund, but the majority of the fund’s overweight holdings outperformed the benchmark following strong 2Q/interim results. Additional outperformance was generated by underweight positions in retail property and lodging (hotels) both of which continued to underperform the index. The fund’s overweight positions in German residential companies were a drag on performance as concerns continued to weigh on share prices, following Berlin’s parliament approving in principle a five-year rent freeze. From a country perspective, ‘safe haven’ markets including the US, Japan, Sweden and Switzerland (together, 75% of the index) drove the index and Fund higher.

Market overview

Global REIT markets rallied on the back of increased expectations of lower for longer interest rates as well as improved sentiment following a perceived easing in China- US trade tensions. In addition, Q2 and interim results continued to meet or exceed expectations, with guidance pointing to robust operating performances (except for retail and lodging/resort REITs) for the rest of the year.US and Canadian property markets continue to benefit from relatively buoyant economic conditions driving up demand across all property subsectors (except retail and lodgings/resorts) while supply remains at or below historic average levels. As a result, REITs continued to report steady growth in earnings, with cautious optimism about the rest of the year and 2020. Balance sheets are healthy in aggregate and liquidity remains high, with over $340 billion of private equity capital available for investment. European property markets prospects continue to diverge. The structural demand for industrial assets continues unabated across all regions, reflecting the relentless rise of online shopping. The demand/supply imbalance driving rental growth is also marked in various residential markets such as Germany, Sweden and the Netherlands. UK and European retail property continue to see a structural reduction in the demand for space. The multi-year negative impact of this trend continues to affect UK high streets and Western European shopping centres the most, with landlords having to generate more cost efficiencies and increase incentives for a shrinking number of tenants. Paris and Madrid office markets continue to benefit from strong demand/supply imbalances while niche property markets such as healthcare and student housing are showing growing rental values due to structural growth factors, driving strong performance across Scandinavia, Benelux, Ireland and even in the UK. In Asia, the focus was on Hong Kong as the city continued to suffer from negative sentiment following civil unrest due to the Chinese extradition bill (that is expected to be withdrawn in October) and concerns over the city’s autonomy in the medium term. Singapore’s underlying property markets continue to benefit from robust occupier demand and weak growth in supply. In Japan, positive momentum continues in the country’s main city office, retail and industrial markets, with vacancy levels at record lows and rental growth expectations throughout these sectors. Australia’s consumer spending rate is tapering off, which is continuing to weigh on the retail and residential markets, while the main cities’ industrial markets continue to grow in line with the global trend of growth in online retail.
Looking ahead

In Q4, we will be watching our underweight exposure to the UK more closely given the Brexit deadline of 31 October. We expect increased investor concerns regarding a global economic slowdown to continue to polarise sector share price performance prospects. More defensive subsectors and countries are likely to continue to outperform in this context. Valuation yields, while cyclically high, are more reasonable in relative terms and therefore are likely to continue to be supported by the risk premium vs reference bonds and lower re-financing costs from lower interest rates.

In 3Q19, we reduced our exposure to Hong Kong companies in favour of European industrial and office specialists. We continue to gradually tilt the fund to reflect our view that the best offence is defence at the moment. Following a 6.1% total return in USD in Q3, on average, global listed property was trading broadly in line with reported net asset values and now offers a one-year forward average dividend yield of just under 4%, taking into account a forecast 5% growth in earnings. We expect REITs’ underlying results to continue to perform through to the reporting season in Q1 2020.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

Following a strong first quarter performance of 13.2% in 2019, the fund delivered a negative 3.1% total return in rands for second quarter. This compared with a rand benchmark return of negative 2.1%. Local currency strength (Rand up 2.9% vs USD) was the main driver of this negative performance, as the benchmark delivered a 0.7% positive return.

Our overweight positions in defensive German residential specialists, especially Deutsche Wohnen, detracted from performance as speculation regarding a rent freeze in the city of Berlin hurt this sector. This offset continued strong performances from our overweight positions in industrial and logistics REITs as well as self storage and office REITs in East Asia. From a country perspective, our overweight position in Germany and France detracted from performance, while an overweight position in the US and underweight positions in the UK and Hong Kong contributed positively.

Market overview

Globally, REIT markets had a tougher second quarter following the strong rally in the first quarter of the year as prime property yields continue to compress albeit increasingly modestly as pricing has in many cases exceeded previous peak levels reached in 2007. This is especially true in East Asia’s most developed cities. US & Canadian property markets continue to benefit from relatively buoyant economic conditions driving up demand across all property subsectors except retail, whilst supply remains at or below historic average levels. As a result, REITs in this region continued to report steady growth in earnings in line with expectations with cautious optimism about the rest of the year and expectations of a recession pushed out to 2021. Balance sheets healthy and liquidity remains high with over USD300 billion of private equity capital available for investment. In contrast to Q1’s broad rally, performance this quarter was more mixed with defensive sectors such as industrial, self storage and residential outperforming retail and office sectors.

European property markets delivered a mixed performance for the quarter with Germany’s residential markets being challenged by politicians and the UK continuing to suffer from Brexit uncertainty. The structural demand for industrial assets continues unabated across all regions thanks to the relentless rise in online shopping. The negative impact of this trend is mostly affecting UK high street retail & Western European shopping centres, with vacancies and incentives to retain tenants on the rise. Paris and Madrid office markets are supported by positive demand/supply imbalances and niche property markets such as health care. Student housing is also showing growing rental values thanks to structural growth drivers, driving strong performance across Scandinavia, Benelux, Ireland and even in the UK.
In Asia, Hong Kong was the worst performing market following the protests against the Chinese extradition bill and wider concerns over the city’s autonomy in the medium
term. This is in stark contrast to Singapore where property markets are thriving, fuelled by strong occupier demand and weak growth in supply. In Japan, momentum continues in the country’s main city office, retail and industrial markets with vacancy levels at record lows and rental growth expectations throughout. Australia’s consumer spending rate is tapering, negatively impacting the retail and residential markets, while the main cities’ industrial markets are growing in line with the global trend of online retail. Most city office markets continue to recover from lows in 2018 with rents rising modestly in 2019. This trend is expected to continue into the next two quarters.

Looking ahead

We expect concerns regarding trade wars, geopolitical tensions and UK political uncertainty to abate in the third quarter following growing expectations of increased monetary support from the G7 central banks with economic risks taking centre stage. This is a supportive environment for property and REITs as long term leases cushion investors from the early effects associated with any economic weakness. In addition, valuation yields and earnings are supported by a growing risk premium and lower re-financing costs from lower interest rates.

We reduced our exposure to German residential companies during the second quarter of 2019, in favour of continental industrial specialists. Our fund’s exposure reflects our view that defensive property exposure, with a clear focus on risk mitigation, is the correct strategy in the current environment. We encourage investors to take a threeto five-year view. At the end of the quarter, Global listed property was trading at a discount of about 5% to current net asset value and offered a one-year forward average dividend yield of just under 4%, assuming just over 5% earnings growth.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The fund delivered about 2% returns in ZAR for the third quarter versus a benchmark return of 3%. Year-to-date the fund has returned about 14% returns in ZAR. This is marginally behind the benchmark, which has delivered 15% year-to-date. The bulk of the fund year-to-date returns in ZAR were driven by the near 14% rand weakness against the dollar. The third quarter performance of the benchmark was relatively weak albeit positive, after the market recovered from a strong second quarter in which the fund delivered 21% in ZAR. Despite a relatively weaker third quarter where the benchmark returned 0.3% in US$, the global property index has been basically flat year-to-date in USD, delivering a total return of 1.3%. Our underweight position to the US detracted from performance in 3Q18 whereas our overweight position in Germany helped the fund’s performance. From a stock selection perspective, we benefitted from our overweight positions in Leg Immobilien (German residential), Simon Property Group (Retail) and Prologis (Logistics), which did well for the quarter. While helping performance in 2Q18, overweight positions in self-storage stocks such as Public Storage, Cubesmart and Extra Space Storage detracted from our performance in 3Q18.

Market overview

The US raised interest rates by another 25bps late in 3Q18 on the back on continued strong economic data. US 10-year bond yields rose from 2.86% to 3.06% during the quarter, with global property performing relatively well as rates continued to rise. In USD, the US (+0.8%), Hong Kong (+6.8%) and Canada (+4.8%) were amongst the best performing countries, while Europe (-9%) and the Netherlands (-11%) were amongst the worst performing markets. US retail property focused stocks such as Simon Property Group have continued to recover after falling out of favour due to industry store closures and concerns around the growth of e-commerce. UnibailRodamco-Westfield, a global retail stock of significant size in which we have a marginal overweight position, has not yet seen the positive performance evidenced in Simon Property Group. There has been no major changes to property fundamentals across the various markets and sectors, with perhaps the expectation that the US will potentially raise interest rates faster than initially believed at 2Q18. The fund continues to remain overweight Europe with a specific focus on Germany and has a selective underweight position in the US. It is largely neutral on the UK, Australia, Japan, Singapore and Hong Kong.

Looking ahead

Global listed property is trading at a discount of about 8% to net asset value and is offering a one-year forward yield of just over 4%, assuming 5-6% earnings growth. Markets are forecasting one more Fed interest rate hike in 2018, with a continuation of the hiking cycle in 2019. This, together with global trade wars and geopolitical tensions could continue to cause some volatility in the short term. The rand volatility against the USD also poses a risk to returns. However, property fundamentals remain good in general and are backed by positive economic growth prospects. We encourage investors to take a 3 to 5 year view. The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur