International Real Estate Securities- Investment Review & Outlook - February 2012
Cohen & Steers
March 23, 2012
We would like to share with you our review and outlook for the international real estate securities market as of February 29, 2012. For the month, the FTSE EPRA/NAREIT Developed ex-U.S. Real Estate Index had a total return of +7.6% (net of dividend withholding taxes) in U.S. dollars. By comparison, U.S. REITs returned –1.1% as measured by the FTSE NAREIT Equity REIT Index. Year to date, the indexes returned +17.1% and +5.4%, respectively.
International real estate securities added to their year-to-date gains in February, although the pace of the rally moderated. Most markets in Europe and Asia Pacific continued to benefit from the retreat of macro risk concerns.
Better liquidity conditions continued to aid Europe
Keeping bank illiquidity fears at bay, the European Central Bank extended its long-term repurchase operations (LTRO), bringing the total to €1 trillion, although the program was a more subdued market catalyst compared with January.
The U.K had a total return of +1.3%( ). The Bank of England increased its inflation projections, making it less likely to initiate further quantitative easing. The unemployment rate remained steady at 8.4%. Among the market’s leading real estate companies, British Land traded lower, while Land Securities Group had a slight gain. Hammerson was a top performer. The company announced plans to sell non-core office assets and reinvest in more attractive retail properties.
France had a flat return. A pullback in the shares of Unibail-Rodamco was offset by strength in Foncière des Régions, which forecast an improvement in net income for 2012 and announced €600 million in disposals of non-core assets. In Germany (+1.3%), Alstria Office REIT finished lower, having issued equity to finance a €95 million acquisition of six office assets. The Netherlands and Belgium had returns of +0.4% and –1.1%, respectively, with no significant news among companies.
Asia Pacific saw sizable gains
Japan (+19.7%) was the index’s best performer in the month. The Bank of Japan surprised the market by announcing another round of quantitative easing (¥10 trillion). In an attempt to move the country past deflation, the bank also defined specific inflation targets, including the goal of a 1% annual rise in consumer prices. In response, the yen had its steepest monthly decline in two years, sparking hopes that Japan’s exports would revive and help the country’s fragile economy.
In Hong Kong (+11.6%), shares of lower-quality developers rallied on speculation that the government may limit its directed policies on residential development. The rally in Singapore (+11.6%) was paced by development companies that had previously been under pressure. Office owners also performed well.
Australia (+2.2%) underperformed. The country’s central bank, which reduced interest rates twice in late 2011, held rates steady at 4.25%, disappointing investors expecting another cut. The bank indicated that it will keep rates on hold over the near term, absent a significant weakening in the domestic economy.
Europe faces long-term challenges
Europe’s difficult grapple with its fiscal crises has made for a negative macroeconomic backdrop, and we expect a moderate recession as a base-case scenario for the region. The recent LTRO facilities have prevented a severe credit crunch and collapse of the EU banking system. However, we take the view that this three-year program merely buys time to sort out the overleveraged balance sheets of most EU banks; it does not solve the long-term solvency crisis facing Greece and possibly Portugal.
Given this environment, we seek to invest in companies that are best able to shield themselves from the most adverse effects of slowing economies and a general deleveraging. We favor owners of prime office and retail properties that also have solid balance sheets, a combination that provides access to debt capital markets (an alternative to pure banking finance).
Asia Pacific leans toward policy easing
We remain underweight Japan based on relative fundamentals and business models. However, we are exploring the thesis of yen depreciation and the return of cyclicality. In the office market, we expect tenants will become more discerning on earthquake resistance, and favor newer and safer buildings, which should benefit companies that own such properties.
Hong Kong’s economy is likely to moderate further, although renewed liquidity in China could create select pockets of strength. The prime retail sector stands to benefit most from mainland tourist spending, but nationwide sales growth may slow due to tempering domestic consumer confidence.
In Australia, we expect only a slow recovery in consumer spending, given the central bank’s reluctance to loosen monetary policy further. The mining economy continues to be a strong driver of incremental growth, but the non-mining economy has not seen a significant benefit from stronger capital expenditures.
Singapore’s cyclical sectors, such as offices and hotels, stand to benefit the most as the global growth recovers, given the country’s open economy nature. We are more positive on hotels due to tighter supply and strong intra-regional traveling; office has a less favorable supply picture, but we believe the potential downside in rental expectations has been substantially priced in.
(c) Cohen & Steers