Well, if ‘a week is a long time in politics’ (and even longer in UK politics!), it’s also a long time for the listed global real estate sector. Ironically as a property developer moved into the White House last autumn, the sector badly underperformed as equity investors switched into reflation trades and bond investors headed for the hills. For investors who still think real estate is a good inflation hedge, its been a harsh lesson – as inflation comes through, bond yields typically rise and the sector in most cases gets caned at least short term.
But four months into the year, the ‘Trump bump’ has run out of steam on Obamacare and the global real estate sector (TR +6.5% in USD) has marginally outperformed global equities YTD (+6.1%). Emerging market real estate (+18%) leads the way, with Asia-Pacific (exc Japan) up strongly (TR +11%). US real estate is now underperforming (unsurprisingly given tight FFO yields) but the significant change is that the UK real estate sector is outperforming (+10.7%), helped by the recent pop in sterling on the back of the Prime Minister’s call for a snap election, and growing concern over the potential outcome of European elections. Ignoring currencies, the UK sector has even outperformed domestic UK equities (+6.8% v +2.2% YTD).
So when equity markets want to believe in growth and a rising yield curve the sector underperforms, but when equity markets are looking for more defensive bond proxies the sector is quickly back in favour and equity issuance immediately picks up! The exception to this is Asia where real estate is very much a growth and cyclical asset class thanks to its residential and development components, and I’m pleased to have participated in the rallies in Australia, China and Singapore (and not to have invested in Japan where the sector remains an enigma). But I failed to catch the bounce in Hong Kong – I find this market difficult to read from London (in spite of good disclosure and the detailed market research available) given its juxtaposition – sandwiched between volatile market sentiment on China growth v Fed policy on US rates.
I started the year with major contrarian plays v the EPRA/NAREIT global real estate sector, and in particular under-invested, underweight the US, and underweight the retail sector (the dominant listed exposure). I have been slowly investing back into the UK and Asia but I remain underweight the US and retail.