Cohen & Steers Emerging Markets
Real Estate Securities Strategy
Cohen & Steers
June 19, 2012
We would like to share with you our review and outlook for emerging markets real estate securities as of May 31, 2012. For the month, the FTSE EPRA/NAREIT Emerging Real Estate Index had a total return of –9.7% in U.S. dollars (net of dividend withholding taxes), compared with –6.4% for the FTSE EPRA/NAREIT Developed Real Estate Index (net), a broad measure of the global real estate securities market. Year to date, the indexes returned +9.8% and +7.9%, respectively.
Investment Review
Emerging market real estate securities declined in May, as recent optimism about the global economy faded. Although many headlines focused on a potential Greek exit from the eurozone, more worrisome to the market were signs of trouble among Spanish banks. Adding to the generally gloomy backdrop for equities were signs of a rapid slowdown in China and disappointing economic data out of the United States.
Investment capital flocked to perceived safe havens such as the U.S. dollar, while emerging market currencies weakened considerably, particularly those considered riskier or having exposure to commodities. (Currency factors contributed nearly half of the net decline in May.) Prices for oil, industrial metals and other commodities retreated amid reduced global demand. On the other hand, falling commodity prices helped ease inflation concerns, setting the stage for further interest rate cuts by central banks.
The flight to safety generally favored commercial landlords, while developers underperformed due to increased margin pressures. For example, in Brazil (–9.1% total return(1)), homebuilders PDG Realty and MRV Engenharia continued their sharp descent, burdened by operational difficulties, project delays and rumors of liquidity problems. In contrast, BR Properties, which owns and develops office, retail and industrial properties, had only a modest decline, aided by stable cash flows and strong commercial fundamentals. Brazil’s domestic economy has remained relatively strong despite global uncertainty, with good wage growth, low unemployment and improving consumption.
China (–2.3%) outperformed, reflecting the market’s expectation that policymakers would respond to decelerating growth with additional stimulus measures. Residential sales volumes were decent, and mortgage lending has improved. Some developers even held off on new projects in anticipation that home buying restrictions would be relaxed later this year, potentially offering better pricing conditions.
(1) Country returns are in local currency as measured by the FTSE EPRA/NAREIT Emerging Real Estate Index.
India (–6.9%) continued to see challenging operating conditions as the country struggled with reduced foreign investment, a rapidly weakening currency and widening budget deficits. Thailand also underperformed (–6.8%), although its economy has rebounded surprisingly well following last year’s floods, with factories resuming production and domestic consumption showing improvement.
South Africa (+0.4%) was one of two markets with a positive return, consistent with the more defensive characteristics of its commercial property companies. However, the South African rand was particularly volatile due to the country’s commodity exports.
Investment Outlook
We believe emerging markets real estate securities continue to offer attractive upside potential given moderating inflation pressures and tepid growth in developed markets. Policymakers in emerging economies have indicated increasing comfort with monetary easing, and domestic demand remains robust in many markets. We are generally seeing greater opportunities in residential developers, although we are taking a balanced approach to the portfolio with respect to its cyclical positioning.
We continue to find China attractive, as we believe property companies are likely to be among the primary beneficiaries of additional policy easing. We also like Thailand, the Philippines and Indonesia, which have been able to successfully manage inflation through effective central bank policies.
We have become more defensive in Brazil, although we continue to find the retail market attractive due to its strong fundamentals. We remain more cautious toward emerging markets in Europe and the Middle East. We are also underweight South Africa, as we believe investors have placed too high a premium on its defensive cash flows.
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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