The primary theme of the third quarter was deteriorating economic growth around the globe, prompting central banks to introduce fresh stimulus to stave off recession
This caused interest rates to fall which was generally supportive of property stocks given that credit markets remain robust and are not acting as if there is an imminent recession.
In Asia-Pacific, Hong Kong is seeing weak sentiment as social unrest continues despite the government trying to strike a less combative tone and offering some concessions. The protests are starting to have a noticeable impact on the local economy with retail sales and inbound tourism seeing significant declines. Further, a lack of progress and conflicting messages regarding the US-China trade war are adding to the negative sentiment. In Australia, the Reserve Bank of Australia (RBA) cut its cash target rate another 25 basis points to 0.75% given both subdued inflation and an uncertain outlook for inflation. This move is also supportive of real estate in general. Elsewhere, we saw more capital raising activity in the region, primarily among S-REITs and J-REITs.
In Europe, the 10-year German bund yield reached a record low at – 0.71% as the European Central Bank (ECB) proposed more stimulus due to weak economic data and low inflation. This helped drive positive performance in defensive sectors, which includes property stocks. Continental Europe has been negatively impacted by the decline in the global manufacturing sector, partly as a result of the US-China trade war dampening manufacturing activity globally. Economic data in the United Kingdom continues to be weaker than Europe but is acting resilient in the face of Brexit uncertainties. Despite these negatives, the overall region is seeing strong capital markets activity with mergers and acquisitions (M&A) activity and pending initial public offerings (IPOs) likely to happen before year end.
We continue to see ample debt and equity capital for real estate assets
In North America, the lagged effects of US interest rate increases by the Federal Reserve (Fed) began to slow the economy as shown by leading indicators such as purchasing managers indices (PMIs). This caused the Fed to make two consecutive quarter-point cuts to bring the upper bound of the Federal Funds Target Rate to 2.00% with the market implying almost two more cuts of the same magnitude before the end of the year. As it was elsewhere around the globe, this was positive for REITs and led to further capital raising. Once unheard of in the REIT space, issuance of 30-year unsecured debt is becoming more common at ultra-low interest rates. Further, employment growth continues to be positive with unemployment claims at all-time lows, providing continued demand for real estate. And in Canada, strong employment growth has allowed the Bank of Canada to maintain interest rates while the rest of the world cuts rates.
The upside to the decline in interest rates globally has been a significant uptick in equity and debt issuance by REITs. This will give many companies more dry powder to acquire and grow earnings. We continue to see ample debt and equity capital for real estate assets which, along with lower interest rates, should support property values and the property market cycle going forward.
FTSE EPRA/NAREIT DEVELOPED RETURNS IN USD AS OF 9/30/19
Given the late cycle nature of the current times, low interest rates, and central banks that are working to keep rates low, we believe property stocks are set to benefit given their higher dividend yields and stable cash flows. Further, with generally positive employment growth driving demand and robust capital markets, we also believe this will provide a good backdrop for stock picking for our seasoned investment team.
- Past performance is no guarantee of future results.
- 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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- NASDAQ is a broad based capitalization index-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is the measure of the performance of 30 “blue-chip” stocks, considered the leaders of the market. The S&P 500 Index is an unmanaged index generally considered to be representative of the large cap segment of the market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 11% of the Russell 3000 total market capitalization. The Dow Jones Utility is price-weighted average of 15 utility companies that are listed on NYSE and involved in production if electrical energy. The MSCI World Index is free-float weighted equity index which include developed world markets. The FTSE EPRA/NAREIT (Europe Public Real Estate Association/National Association of Real Estate Investment Trusts) Index is a total return performance index of all equity REITs tracked by FTSE EPRA/NAREIT. The Indices are presented for illustrative purposes only and are not intended to imply Heitman’s past or future performance. The performance of the Indices assumes dividend reinvestment, but do not reflect transaction costs, advisory fees, custodian fees, trading costs and other costs of investment. Individuals cannot directly invest in any of the Indices described above.