There have been some major swings in the global real estate sector so far this year, with big gains seen in the logistics sector at the expense of retail, and a material bounce in Asia Pacific (excluding Japan).
So far the global real estate sector (3.4% total return in US dollars) is underperforming general equities (7%) as one might expect given the Trump reflation trade. However the US 10-year bond has not moved much in the first quarter, and the US sector is flat year-to-date, with most of the bond market fall-out occurring at the end of last year. And currencies YTD have not been as volatile.
The most exciting sector is logistics, with Global Logistics Properties (up 26% year-to-date) undergoing a strategic review. GLP has material holdings in Asia and North America, and for some time we have been anticipating a move into Europe but all is now subject to review.
Making inroads
On fundamentals, the logistics sector continues to make in-roads into traditional retail and almost anywhere you look around the world retail is underperforming (eg Simon Property Group, General Growth, Westfield, Hammerson, Unibail, and Klepierre – in spite of share buybacks), and many secondary retail stocks are suffering – not helped in some cases by dilutive equity issues. Finally the world has woken up to what Andrew Jones at LondonMetric has been saying for the past three years, that the march to global domination of Amazon and other on-line guerrillas has only just started.
Capital markets get this and it is encouraging to see both SEGRO (for its development pipeline) and LondonMetric (short-cycle development and “last mile” investment) take advantage of strong investor support. Interesting also to see Hansteen sell its German/Dutch portfolio and propose a return of capital, although this looks more the booking of a currency gain and a tidy profit rather than a big call on the sector. The one exception among the global peers is ProLogis which has underperformed so far this year, as ‘Wall Street’ would appear more concerned about potential trade barriers with China and Mexico affecting US logistics demand rather than the e-commerce upside.
Chinese bounce
The second big swing this year has been the bounce in Hong Kong and China. I confess I missed the Hong Kong re-rating, as for the past two years retail sales and rents have been very weak as a result of China’s economic slowdown and falling tourism. However the Chinese economy appears to have stabilised and the relief rally following the Fed’s hike in interest rates (combined with a general switch into emerging market equities) was profound. I still find Hong Kong difficult to trade and prefer China, Singapore and Australia for my AsiaPac exposure (13.5% YTD). Meanwhile, Japan continues to drift.
All the above are bigger stories in the global sector than Brexit, and I find it interesting that Gecina (as a Paris office proxy) has underperformed the London REITs so far this year (helped by some stunning property deals and capital returns from GPE and Derwent). A clear winner in office markets at present is New York, but we shall see if demand from soon to be deregulated US investment banks can meet the new office supply coming on-stream in Manhattan. Meanwhile, note that US datacentres are outperforming – the world’s insatiable appetite for data continues unabated. What a pity we don’t have good listed exposure in Europe (not forgetting SEGRO’s strong UK exposure).
Finally a word on residential, which remains a growth sector globally. In Europe, the German residential sector has further operational upside (even if the bond market angle is played out) and the Berlin story is particularly compelling. And in Spain we have just seen the IPO of Homes, with the potential to become the national market leader. I am a big fan of the Spanish housing sector and its recovery potential, but the key for this stock is to meet its ambitious roll-out targets.
Where does the global sector go from here? Well it’s clear that as a ‘bond proxy’ the sector performs whenever the ‘Trump bump’ runs out of steam. Having started the year under-invested, I am slowly filling some of the gaps but remain cautious on retail generally (although mindful consolidation could re-appear) and on Japan.
