Emerging Markets Real Estate Securities Investment Review & Outlook First Quarter 2012
Cohen & Steers
April 20, 2012
Emerging Markets Real Estate Securities
Investment Review & Outlook
First Quarter 2012
We would like to share with you our review and outlook for emerging markets real estate securities as of March 31, 2012. In the first quarter, the FTSE EPRA/NAREIT Emerging Real Estate Index had a total return of +20.5% in U.S. dollars (net of dividend withholding taxes), compared with +12.7% for the FTSE EPRA/NAREIT Developed Real Estate Index (net), a broad measure of the global real estate securities market.
Emerging market real estate securities had a strong gain in the first quarter, a positive period for stocks broadly amid a lessening of macro risk concerns. Investor confidence improved as the U.S. showed modest but sustained growth and Europe avoided a bank liquidity crisis. Emerging markets additionally benefited from a general moderation in inflation that has opened doors to policy easing in the developing world.
Nearly all markets advanced. China was a standout with a total return of +29.1%(note 1), rallying on optimism that government policy has passed an inflection point, perhaps signaled in November when China cut its reserve requirement ratio for the first time in three years. Beaten-down developer stocks rebounded on hopes that a “soft landing” economic scenario would cause the government to lift restrictions on housing, which have pressured home prices over the past six months.
The Philippines (+32.3%) benefited from structural consumer growth and a developing credit market. Indonesia (+17.6%) had those attributes as well, although there were concerns that a reduction in government oil subsidies would hinder consumer spending via higher gasoline prices.
In Brazil (+18.0%), inflation continued to moderate after peaking at 7.3% in September, allowing the country’s central bank to reduce interest rates in the quarter from 11% to 9.75%. Retail sales reported in March were better than expected, rising 7.3% in the past year, compared with consensus expectations of 6.2%. A favorable retail environment was reflected in solid fourth-quarter earnings reported by BR Malls, with results driven by strong internal growth.
Mexico (+5.4%) underperformed the index. Homebuilders were volatile, reflecting choppy fundamentals—government incentives have shifted in favor of vertical housing, and developers have had difficulties managing the transition. In news, Fibra Uno, Mexico’s first REIT, had a $600 million equity raise in which we participated. The company seeks to acquire income-producing properties at attractive prices.
South Africa (+8.5%), one of only a few emerging markets to advance in 2011, underperformed in the quarter. Its economy continued to display relatively stable growth that is slowly improving.
A general moderation in inflation pressures is giving emerging market authorities more liberty to pursue policy stimulus, auguring well for domestic growth. We believe this will create opportunities for residential developers in various markets and we have increased our allocation to these companies.
Our favored markets include Brazil, based on its natural resources, growing consumption trends and shareholder-friendly business environment. We particularly like the retail market, which continues to exhibit strong fundamentals. We also prefer Asia Pacific countries with more flexible economic policies, particularly Thailand and Indonesia. We are underweight Mexico and continue to view the Middle East as unsuitable for investment due to political instability and corporate governance.
The index has rebalanced and grown
As of March 16, FTSE expanded its Emerging Market Real Estate Index. Among the changes, several large China companies migrated from the Developed index. China now accounts for 25% of the index, up from 8%, and the index is more balanced between China and Brazil.
Country returns are in local currencies as measured by the FTSE EPRA/NAREIT Emerging Real Estate Index.
(c) Cohen & Steers