Emerging Markets Real Estate Securities - January 2012 Review and Outlook
Cohen & Steers
February 21, 2012
The following is our review and outlook for emerging markets real estate securities as of January 31, 2012. For the month, the FTSE EPRA/NAREIT Emerging Real Estate Index had a total return of +14.5% in U.S. dollars (net of dividend withholding taxes), compared with +7.7% for the FTSE EPRA/NAREIT Developed Real Estate Index (net), a broad measure of the global real estate securities market.
Investment Review
Emerging market real estate securities made strong gains in January after struggling through much of 2011. The group benefited from an easing of macro concerns that lifted stocks broadly: improved liquidity for European banks, evidence of a soft landing in China and continued signs of U.S. growth. Emerging markets outpaced their developed counterparts in an environment that especially favored investments with higher risk/reward profiles.
Brazil (which had a total return of +10.9% in the index) saw a continued improvement in economic data, including better credit growth and retail sales. Stocks of homebuilders were especially strong, including industry leader PDG Realty and Gafisa, a lower-quality homebuilder that rallied on speculation it would sell assets and improve its balance sheet. Mexico (+15.4%), which had a sizable decline last year, was aided by better conditions in the U.S., its major trading partner. This countered limited domestic stimulus and relatively lackluster real estate business models within country.
The best-performing market in Asia was India (+23.5%), another poor 2011 performer that snapped back. The outperformance was partly in response a relatively small move toward policy easing. The Bank of India unexpectedly reduced banks’ cash reserve ratio to 5.5% from 6%, despite the country’s persistently high inflation. Thailand (+5.9%) and Indonesia (+2.0%), top performers in 2011, had relatively modest gains in the month. The Philippines (+17.5%) benefited from a healthy mix of moderating inflation and domestic growth. The rally in China (+14.5%) was driven by lower-tier names as risk concerns abated.
South Africa (+5.4%) underperformed, but added to its 2011 gain. It is a more defensive market (with relatively stable business models) that nonetheless drew support from improvement in Europe, a consumer of its exports.
Investment Outlook
We believe that recent developments within emerging real estate markets are consistent with our macro view. As emerging economies work through the late stages of a mid-cycle slowdown, policy markets are attempting to engineer soft landings as inflation pressures moderate. Given the potential for better domestic growth, we expect to take advantage of buying opportunities among residential developers (e.g., in Brazil), and have selectively been moving in that direction.
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 prefer Asia Pacific countries with more flexible economic policies, particularly Thailand and Indonesia. South Africa has attractive characteristics in the form of stable cash flows and relatively low volatility.
We are maintaining our underweight in India, which has high inflation, limited easing tools and companies that continue to struggle operationally due to slower sales, scarce loans and, in some cases, corporate governance issues. We are also underweight in Mexico and have no exposure to European emerging markets. We continue to view the Middle East as unsuitable for investment due to political instability.
Country returns are in local currencies as measured by the FTSE EPRA/NAREIT Emerging Index.
(c) Cohen & Steers
