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Global Real Estate Securities
As of July 31, 2010
We would like to share with you our review and outlook for the global real estate securities markets as of July 31, 2010. For the month, the FTSE EPRA/NAREIT Developed Real EstateIndex had a total return of +9.6% (net of dividend withholding taxes) in U.S. dollars. Year to date, the index had a total return of +4.6%.
INVESTMENT REVIEW
Global real estate securities rebounded as several factors helped ease risk concerns. Investors were relieved that Greece, Spain and other countries at the heart of Europe’s sovereign debt crisis were able to roll over their debt on favorable terms. Stress tests in Europe, while viewed as lenient,revealed banks’ holdings, allowing investors to themselves quantify how much troubled sovereign debt the banks own. Some positive economic data from Germany and signs that China and Australia are relaxing their tightening bias contributed to a better trajectory for global growth expectations.
In the United States (which had a total return of +9.5% in July as measured by the FTSE NAREIT Equity REIT Index), real estate companies for the most part met earnings expectations, although guidance was mixed. Apartment REITs (which had a total return of +10.8% in the month) 1 and hotel companies (+7.0%) delivered the best results; news was more sporadic in other sectors. AMB Property in the industrial sector (+5.9%) lowered its guidance, reflecting a slow recovery in global trade. In the office sector (+10.7%), Mack-Cali reduced its outlook amid lackluster demand for suburban office space.
The shopping center (+10.8%) and regional mall (+10.4%) sectors outperformed the index. For mall owners, tenant credit is the highest it has been in years; retailers are for the most part profitable and have ample cash, which has lessened the threat of bankruptcies. The self storage sector (+11.2%) has been aided by a general improvement in economic conditions.
Returns were positive across Europe
The United Kingdom had a total return of +7.3% in the month. 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.
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 Coriorallied. 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. 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.
Hong Kong and Singapore led Asia Pacific up
Hong Kong property stocks (+8.6%) extended a rally that began in June with the completion of a successful land auction that sought to ease an overheated housing market. Residential developers were the chief beneficiaries. July saw another successful auction—a luxury residential parcel—which sold at a premium to the market consensus. The government announced three additional land sales in August, bringing the total number of transactions to eight so far this year.
Australia property company (+1.0%) underperformance was driven by a rotation out of real estate securities following a compromise between the Labor government and mining industry on the proposed resource super profit tax. Investors in Australia’s resource-heavy securities market had favored real estate stocks for their perceived defensive qualities during the market turbulence that occurred in the aftermath of the proposed tax increase.
In Japan (+2.0%), real estate securities surged in the first half of the month but gave up ground in the last week with the release of lackluster earnings. J-REITs were solid outperformers as investors were attracted to their relative high yields after the yield on 10-year government bonds fell to 1.07%. Office company stocks remained weak as tenants are continuing to request rent reductions.
Singapore (+9.0%), the region’s top-performing developed market, was led by large capitalization developers, which had lagged other property types. Demand for office space in the second quarter rose to its highest level since third quarter 2007.
INVESTMENT OUTLOOK
Although U.S. economic growth has decelerated, we still expect positive absolute data on gross domestic product and employment. A lack of new supply and stabilizing tenant demand should generally be positive for property owners, but demand is mostly focused on high-quality assets. Class B and C properties remain at a disadvantage. From a sector perspective, there should be greater strength in apartment occupancies and rents as job growth gradually recovers, while tenant demand for secondary industrial, retail and office properties is more tepid.
The U.K. aims to repair its deficit
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. 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. Our focus remains on pan-European retail companies with properties in desirable locations.
Japan’s recovery is delayed
In Hong Kong, we expect improvements in labor markets and increasing tourism to continue benefiting the retail sector. The strength of Hong Kong’s luxury residential market has raised concerns over housing affordability. We believe that tighter loan-to-value restrictions and increased land allocation should ease the situation.
The Japanese property market remains weak, as tenants continue to seek rent and space reductions. There are some positive signs, however. The residential market is improving now that affordability has improved, and grade-A office leasing activity is picking up asopportunistic tenants seek to upgrade at attractive rental rates. Still, fundamentals remain weak, and we retain a cautious view. A more robust recovery in office demand is still 12 to 24 months away.
Australia’s central bank kept interest rates unchanged at 4.5%, in line with consensus forecasts. We continue to have a positive view of property fundamentals, especially in the office sector, where valuations continue to rise. Industrial fundamentals have significantly improved in Sydney and Melbourne, but that has not been the case for secondary locations. Retail fundamentals have been softer than expected; there is still a significant amount of discounting of rents for large anchor stores, but occupancies remain at 99%.
A recovery in Singapore’s exports and domestic demand should bode well for continued economic growth in 2010. We are taking a more positive view on sectors driven by a recovery in external demand. These property types include office, where rents are increasing, occupancy levels have been resilient and new demand is accelerating. Hotel fundamentals are also encouraging, with visitor arrivals picking up.
Facing slowing global economic growth, and slowing rent growth in many markets, our focus is on companies with strong balance sheets and the willingness and ability to make accretive acquisitions.
1 Sector returns as measured by the FTSE NAREIT Equity REIT Index.
2 Country returns are in local currency as measured by the FTSE EPRA/NAREIT Developed 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. Fund performance information is available through the link or links below.
Cohen & Steers Global Realty Shares Performance
Cohen & Steers Institutional Global Realty Shares Performance
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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