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Europe
As of July 31, 2010
We would like to share with you our review and outlook for the European real estate securities markets as of July 31, 2010. For the month, the FTSE EPRA/NAREIT Developed Europe Real EstateIndexhad a total return of +13.9%(net of dividend withholding taxes) in U.S. dollars. Year to date, the index had a total return of -6.5%.By comparison,U.S. REITs, as measured by the FTSE NAREIT Equity REIT Index, had a total return of +9.5% for the month and +15.6%for the year to date.
INVESTMENT REVIEW
European real estate stocks had strong performance in July, reflecting a lessening of the risk concerns that suppressed performance in the second quarter. Investors were relieved that Greece, Spain and other countries at the heart of the sovereign debt crisis were able to roll over their debt on favorable terms. Meanwhile, stress tests gave the market more confidence regarding the health of Europe’s banks; while the headline results were met with some skepticism, investors now had better information with which to conduct their own tests. In addition, the latest recommendations from Basel, a committee representing central banks around the world, were less strict than some had feared with regard to banks’ equity capital requirements, liquidity coverage ratios and date of implementation.
The United Kingdom had a total return of+7.3% in the month.1 Investors began to look favorably on recent government austerity measures—which could lower inflation and interest rates—and signs of an improving economy. There was evidence that growth and net absorption are still positive in both the West End and the City sections of London. Land Securities, one of the market’s largest REITs, had a strong return. The company’s quarterly management statement highlighted its success in selling assets and deploying capital into higher-yielding projects.
France (+9.4%) was led by a solid gain from Unibail-Rodamco. In reporting first-half results, the company announced that it would pay a special dividend amounting to 15% of its total market capitalization. This news signals both a highly disciplined approach by Unibail toward its standards for acquisition opportunities and a recognition that asset values have risen considerably in the wake of strong investor demand.
In the Netherlands (+8.9%), retail-property owner Corio rallied. The general relief that dominated markets in July had a positive effect on the perception of Corio’s pan-European portfolio of assets. Germany (+8.0%) continued to benefit from signs of improved exports and consumer confidence; office owner Alstria was a standout. Markets in Scandinavia performed well. Finland (+12.2%) and Sweden (+6.8%), which struggled along with other European markets in the second quarter despite having healthier economies and relative insulation from the debt crisis, rebounded.
INVESTMENT OUTLOOK
Austerity measures introduced to address the United Kingdom’s record deficit are likely to increase, although fiscal consolidation is not necessarily inconsistent with economic growth. The situation is comparable to that of the mid-1990s, in which the United Kingdom and other G7 countries underwent a period of deficit repair while maintaining growth. U.K. business investments and exports need to continue to improve, and we believe that globalization, as well as the development of emerging markets, should support future growth in these sectors. However, as the risk grows of an economic contraction in Europe, the U.K. economy will bear the risk of stagnation or decline.
France faces a relatively high public deficit of about 6%, leaving the government with little room for further stimuli. While still healthy with regard to vacancy, the Paris office market is seeing rents come under pressure, and new supply is growing. These trends should increase the vacancy rate and may drive some rents lower.
The Netherlands’ economy is recovering slowly from a substantial fall in global trade and its dependence on financial institutions. Its office market, however, lacks investable, high-quality companies and suffers from long-term structural issues, due to relatively plentiful supply and a high proportion of outdated properties. The retail sector remains stable (private consumption is generally more stable than exports), and we see limited risk both in high-street retail and shopping centers. Our focus remains on pan-European retail companies with properties in desirable locations.
1 Country returns are in local currency as measured by the FTSE EPRA/NAREIT Developed Europe Real Estate Index.
Past performance is no guarantee of future results.
The performance information in the preceding commentary does not reflect the performance of any Cohen & Steers Fund.
Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers fund carefully before investing. A prospectus containing this and other information can be viewed by clicking here or may be obtained by calling 800-330-7348. Please read the prospectus carefully before investing. Cohen & Steers open-end funds are distributed by Cohen & Steers Securities, LLC.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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