Global Public Equity – Quarterly Review

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We should have all expected the year 2020 to not go quietly into the past, as several events made headlines to end the year.

The most significant event was the US presidential election, which saw former vice president Joe Biden defeat the incumbent, Donald Trump, despite the Trump campaign refusing to concede defeat. The outcome of the election had little effect on the market though, as most had anticipated a Biden victory. Shortly after the election, we received the long-awaited news of the first COVID-19 vaccine trial results. The results from the vaccine developed by Pfizer Inc. and BioNTech SE and the vaccine developed by Moderna, Inc. both exceeded expectations and were promptly approved for widespread use. This news provided a strong positive lift to risk assets during the quarter.

That said, we also saw another spike in COVID-19 cases, so we are not out of the woods yet. The increase in cases meant many areas re-instituted varying levels of lockdowns and restrictions that will temporarily impact economic growth. However, continued aggressive actions by central banks around the globe have helped the capital markets function properly in a way not normally seen during a recession. Property stocks remain well off their highs, but companies have shown an ability to tap the equity and debt markets for capital.

Based on guidance from central banks, we expect the global rates to remain low, potentially for years to come. This should be supportive for real estate in general as demand grows.

FTSE EPRA/NAREIT DEVELOPED RETURNS IN USD AS OF 12/31/20

 

Asia-Pacific

In Australia, Victoria’s longer-than-expected lockdown has led to weaker retail operating fundamentals and increased vacancies. However, with COVID-19 case growth slowing later in the quarter and fiscal stimulus measures in place, we now expect to see a rebound in retail sales. In the residential segment, state and federal stimulus is driving a strong residential market, particularly targeted at the first-time homebuyer demographic. Capital values remain steady for the office sector despite weakening fundamentals (with rising vacancy and sublease space). It appears buyers at current values view the current situation as a temporary issue.

Even as we saw a renewed rise in COVID-19 cases during the quarter, residential developers have been able to launch new projects. As we’ve seen elsewhere, retail sales and office demand are improving but remain below pre-pandemic levels.

Singapore is benefiting from declining COVID-19 cases and moving to a “Phase 3 Reopening” towards the end of the quarter. This allows for a greater density of people and stands to benefit the retail landlords.

Europe

As COVID-19 cases began to rise again across most of the region, we saw further lockdowns implemented to contain the pandemic. However, this continues to be met with additional monetary and fiscal stimulus from central banks and governments. This has supported both the capital and property markets, with various property transactions, mergers and acquisitions (M&A) activity, and capital raising happening during the quarter.

Further, we may have also reached an end to Brexit at the end of the quarter … maybe. A breakthrough trade deal was reached between the two sides, but there are still many details to finalize, including financial services to be discussed in early 2021.

North America

In an expected outcome, albeit with coincidental timing, two regional mall REITs announced bankruptcies over the same weekend during the quarter. Pennsylvania Real Estate Investment Trust filed a pre-packaged bankruptcy and is expected to retain some equity value. At the same time, the outlook for CBL & Associates LP is less certain as it works through the process.

Third quarter earnings season for the REITs showed continued improvement in fundamentals as economic activity improved during the summer. This recovery likely stalled, though, during the quarter as case counts increased. Overall, most REITs have adjusted as best as possible to the environment, but there continue to be areas of stress, like hotels, which are still experiencing cash burns. The hardest hit sectors had the largest share price increases on the news of the vaccines during the quarter, though.

Outlook

While we know the global economy is reopening, the threat of COVID-19 has not yet passed. The pandemic will eventually pass, but the timing is unclear. However, we can see some longer term trends accelerate, namely the threat of ecommerce to retail and the resulting benefit to logistics. Overall, though, once COVID-19 passes as a public health risk and economic activity resumes, the commercial real estate market will also see a resumption of demand supported by massive monetary and fiscal stimulus programs around the globe

 

Disclosures
  • 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.
  • Commentary not to be re-distributed without permission.
  • 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.