Cohen & Steers U.S. Real Estate Securities Strategy
Cohen & Steers
June 19, 2012
We would like to share with you our review and outlook for the U.S. real estate securities market as of May 31, 2012. The FTSE NAREIT Equity REIT Index had a total return of –4.5% for the month, compared with a –6.0% return for the S&P 500 Index. Year to date, the indexes returned +8.8% and +5.2%, respectively.
Following positive returns in April, U.S. REITs succumbed to risk concerns to post a loss for May. Although real estate securities continued to outperform the broader equity market as measured by the S&P 500 Index, they participated in a decline driven by renewed worries over global economic growth and conditions in Europe, where the spotlight moved from Greece to Spain. Rumors of bank runs fed speculation that bank recapitalizations and possibly a bailout from the European Monetary Union could be necessary. In this environment, investors’ emphasis on safety was evident in the demand for Treasurys—the yield on the 10-year U.S. note fell to a historic low of 1.6% by the end of the month.
Virtually all property sectors declined. The poorest performers were groups perceived to have higher degrees of economic sensitivity. In the industrial sector (which had a –8.6%(1) return in the index), Prologis was a significant underperformer, despite recent data suggesting that the company’s European operations were holding up well in a difficult geographic region. Hotel REITs (–7.7%) were broadly sold, with the largest declines coming from Hospitality Properties Trust and Pebblebrook Hotel Trust.
Office REITs struggled (–6.2%). SL Green underperformed, although it recently reported two large lease renewals in New York City, its core market. Alexandria Real Estate Equities, which specializes in scientific research and life-science laboratory properties, was hit by the prospect of tenants leaving markets in which Alexandria operates.
Regional mall owners (–5.2%) modestly underperformed. Simon Property Group was in line with REITs broadly, despite having defensive characteristics in the form of long leases within high-quality properties. Apartment companies (–2.4%) were relatively resilient. Although employment growth has been modest at best in the past few months, it has been enough to keep the group’s fundamentals healthy. Health care property stocks (–1.0%) also held up well. Investors were willing to pay a sizable premium to net asset value for the group’s perceived stability.
A disappointing April employment report notwithstanding (job gains falling below 100,000), we continue to expect slow but steady growth, with modest job creation. Such an environment should allow for incremental gains in demand for real estate companies and continued low financing costs (as interest rates remain low). Fundamentals in most sectors should also be supported by only gradual additions to supply, to the potential benefit of property-level cash flow growth.
(1) Sector returns as measured by the FTSE NAREIT Equity REIT Index.
Recent property transactions have largely confirmed our value estimates, but we continue to carefully evaluate our inputs. We see good values in certain cyclical sectors. At the same time, we seek to maintain a defensive component in the portfolio. For this, high-quality malls are more appealing to us than the health care property sector, which in our view is expensive and has become more cyclical for some companies due to the growth of private-pay tenants.
We have a generally favorable view of key office markets, including life sciences, technology and media, as well as New York offices broadly. We are underweight apartments based on valuations and the prospects for a deceleration in earnings growth. We continue to favor prime retail owners, while staying cautious toward health care properties, suburban offices and secondary retail.
Past performance is no guarantee of future results. The performance information in the preceding commentary does not reflect the performance of any fund, product or account managed or serviced by Cohen & Steers. The views and opinions in the preceding commentary are as of the date of publication and are subject to change. There is no guarantee that any market forecast set forth in this presentation will be realized. 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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