Halfway through 2017 the global listed sector is performing better than I had expected, up over 7% Total Return in USD terms, although much of this is down to dollar weakness with the sector up just 2% in sterling and flat in euros. But the big moves for a dollar investor have been in Asia (ex Japan) which is up c. 20% and Europe up 14%. The UK is showing a very credible TR of c. 10% in spite of the political uncertainty which is starting to impact domestic business, consumer and investment decisions.
The big moves within the US are interesting with the regional mall REITs down 10%, and strip centers (adopting the US spelling!) down 18%. Given my views on retail, none of this is surprising, but office REITs at <3% TR are slightly disappointing, although industrials/logistics saw a very solid 10% TR. The big wins in the US came from the alternative sectors: data centers up c. 30%, and lodging and healthcare both up 20%. I participated in the data center move but feel short of lodging (I was worried about supply…) and healthcare (the politics!). The data center performance is very material and makes complete sense given the exponential rise in date use and storage, but it is hard to gain listed exposure outside the US. In the UK we have Segro where the data centre portfolio is under-estimated – not only is logistics and last mile demand strong in the UK (and improving in Europe), but the data centre market is also powering ahead with high barriers to entry. Twenty years ago I imagined all data going through the air (or a ‘cloud’ as it turned out) and that data centers would be obsolete, but the need for highly specified physical storage in locations close to major power supplies remains undiminished.
In Europe, we have seen some solid moves from real estate stocks in Germany (strong underlying data in the residential sector) and France (le Macron effect), but the bigger moves have been in Italy (as the threat of a banking crisis is reduced) and Scandinavia (helped by the Blackstone bid for Sponda, which raises an interesting question as to whether there is more PE driven M&A to come). All this against a background of big general equity flows into European equities on the back of better economic data, a benign outlook for interest rates (in spite of mixed messages from Draghi) and concerns about ratings in US equities.
The surprise perhaps is that the UK has held its own, but coming from a low base (with share prices on fat discounts to NAV at the start of the year). Tenant demand in London offices has remained robust in spite of Brexit and political uncertainty, and new supply is being deferred. We have seen reports of c. 7msf of new London office development deferred and some developers believe this will prove conservative. So while new and potential new office demand is expected to slow, we could have shortages of Grade A offices on a three to four year view.
Meanwhile the relentless advance of WeWorks in the serviced office sector continues with another major letting from Almacantar. There is no question that the millennials love this way of working, and importantly it’s not just SMEs taking this space (and free beer on tap!) but major corporates and professional firms as well. Visiting WeWork in Moorgate is mightily impressive and others want to be in this sector, whether it’s Blackstone buying into TOG, or British Land experimenting with its own flexible office brand. However investors in the listed sector are cautious on the REITs taking too much exposure here: the perception (rightly or wrongly) is that income is less secure, services come at a cost, and there is no way BL can compete with the global connectivity which a WeWork or a Regus (note the Spaces product from Regus provides a very contemporary offer) can provide its customers. Meanwhile the rapid growth in the serviced office market and its capacity will further weaken the second-hand office market where availability is rising.