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.