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U.S. Real Estate Securities
As of July 31, 2010
We would like to share with you our review and outlook for the U.S. real estate securities market as of July 31, 2010. For the month, the FTSE NAREIT Equity REIT Index had a total return of +9.5%. Year to date, the index had a total return of +15.6%.
INVESTMENT REVIEW
U.S. REITs had strong performance in July after two weak months. News from Europe helped ease risk concerns globally; stress tests, 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.
Corporate earnings were generally well received, sending most U.S. shares higher. Real estate companies for the most part met expectations, although guidance for the rest of the year 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. Self storage (+11.2%), one of the strongest-performing property types in the month and year to date, has been aided by a general improvement in economic conditions, and those companieswith high-quality assets have benefited disproportionately
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.
Even modest economic growth should allow for single-digit earnings growth among REITs, with even higher rates of dividend growth as REIT payout ratios move up from historically low levels.A combination of modest occupancy improvements, expense control and external acquisitions should account for the vast majority of earnings growth in 2010–11.
We have seen evidence that investors are beginning to approach commercial real estate more aggressively. Real estate is being perceived as a store of value, with investors finding appeal in owning hard assets with reasonable yields and some inflation protection in a low interest-rate environment. While we have moderated our cap rate and net asset value estimates because of slower economic growth, an upward movement in property re-pricing could develop.
1 Sector returns as measured by the FTSE NAREIT Equity REIT 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 Realty Shares Performance
Cohen & Steers Realty Income Fund Performance
Cohen & Steers Institutional 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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