Global Public Equity – Quarterly Review


The escalating trade war between the US and China dominated global headlines as the US imposed a 10% tariff on $200 billion in Chinese goods and China immediately announced retaliatory tariffs on $60 billion of US goods

This tit-for-tat exchange of tariffs has caused concern around the globe about global trade and global growth in general. Despite this fear, interest rates rose in the quarter, whcih caused property stocks to lag broader equities.

Property stocks in Europe had a small decline during the quarter, but this was bifurcated because the UK was down while the rest of Europe was flat to slightly positive. Rates rose as the German 10-year bund yield crossed through the 50 bps threshold near the end of the quarter. Macroeconomic data continues to show solid growth, but many measures continue to temper from their highs earlier in the year.

Markets in the Asia-Pacific region were choppy as trade war rhetoric and rising interest rates affected stocks in the region. Retail sales growth continues to be robust in Hong Kong, but is showing deceleration as year-over-year comparisons get more difficult. In Singapore, the government surprised the market with a new round of residential housing tightening measures that caused developers to decline. The mergers and acquisitions theme continued as Oxford Properties Group emerged with an indicative bid for Investa Office Fund as shareholders were about to vote on Blackstone Group LP’s lower bid for Investa Office.

In North America, REITs were also flat to slightly positive while broader equities rose to all-time highs during the quarter as the 10-year Treasury yield rose through the 3% level. As in APAC, M&A activity was strong as Brookfield Property Partners LP completed its acquisition of GGP Inc. while Pebblebrook Hotel Trust and LaSalle Hotel Properties agreed to a merger in the hotel sector.

Regional Overview



The APAC region had a modest decline as Japan and Hong Kong had negative returns in USD terms. In Hong Kong, retail sales growth continues, albeit at a slower pace than we saw in the first half of the year given a higher base for comparison. Retail sales are still growing at a high single-digit pace, down from low double digits. While we remain positive on Hong Kong retail sales, our on-the-ground channel checks in China suggest that retail sales are decelerating as the prospects of a trade war with the US negatively impact consumer confidence. The office market also continues to be tight with low single-digit vacancy generating continued rental growth.

The office market continues to be tight in Hong Kong and Japan

In Japan, official land prices nationwide were announced with an increase of 0.1% year-over-year, marking the first rise in land prices in 27 years. The office market also continues to be tight with vacancy dropping to a historical low of 2.45% in Tokyo’s five wards. However, with the typhoon and earthquake in August and September, we expect hotel fundamentals to be worse than expected.

M&A continues to be a feature of the Australian landscape as Investa Office was the subject of a last second bidding war between Blackstone and Oxford Properties as the original Blackstone bid was going to a shareholder vote. Oxford had the highest bid at the end of the quarter, but that bid was only indicative. Office markets in Sydney and Melbourne are showing good rental growth and tightening cap rates. Retail, however, trades at a discounted valuation on due to negative re-leasing spreads and slowing sales growth. We favor higher quality malls in this environment.

In Singapore, the government surprised the market by announcing tightening measures for the property market. This caused Singapore developers to sell off sharply following the announcement, but we believe the bearish reaction was overdone.

Europe and UK

Europe was negative on the quarter, dragged down by the UK after Brexit negotiations reached an impasse at the end of the quarter. Prime Minister Theresa May suffered a major setback as the EU rejected the “Chequers” proposal. The 10-year bund rate rose throughout the quarter and broke through the 50 bps level near the end of the quarter.

We remain cautious on retail, but the discounted valuations could spark some M&A activity

Macroeconomic data continued to show solid growth, though it continues to temper off the higher readings earlier in the year. Purchasing manager indices and German IFO Business Climate Index continue to suggest GDP growth will be in the 2% range. However, Europe did not escape the US-China trade war rhetoric as markets feared spillover effects on global trade.

In central bank action, the Bank of England raised rates 25 bps while the European Central Bank held course with the expected end of quantitative easing in December followed by no rate hikes until at least summer of 2019.

Real estate fundamentals remain strong in all asset classes except for retail. We expect this to continue as economic growth remains positive. We remain cautious on retail, but the discounted valuations could spark some M&A activity. We expect continued cap rate compression in the office sector, especially in prime Paris, Spain, and Sweden on the back of strong like-for-like rental growth. Logistics continues to be a secular winner of technological changes in e-commerce and the global supply chain.

North America

As with elsewhere around the globe, trade and tariffs were the talk of the quarter but there was some good news as the US, Canada, and Mexico agreed to a new trade agreement. The new agreement was not that different from the previous one, but at least the noise from those negotiations can be put to bed. REITs were modestly positive in this region for the quarter, though they trailed broader equities as the S&P 500 index continues to make new all-time highs. This is likely a near-term market reaction to the 10-year Treasury yield rising through the 3% level. However, we continue to see very strong debt and equity markets for commercial real estate causing private market values to either maintain or continue to rise, so we still see attractive valuations in the public REIT market.

Self-storage is a sector we turned incrementally negative on during the quarter, as new supply is expected to dent revenue growth in 2019. Outside of storage, though, fundamentals continue to look firm with a lack of significant new supply and steady demand growth. Data centers and industrial continue to be the standout winners from secular tailwinds in technology. Data centers continue to benefit from the explosive growth in the internet and the need to store ever-growing data, while industrial benefits from growth in e-commerce and the resulting demand for warehouse space.

Fundamentals continue to look firm with a lack of significant new supply and steady demand growth

M&A activity continued as Pebblebrook and LaSalle agreed to a merger after Pebblebrook increased its bid far enough above Blackstone’s bid to be deemed a “superior proposal.” The CEO of Pebblebrook was formerly the CEO of LaSalle, so it looks like he is getting his old company back. Also during the quarter, Forest City Realty Trust, Inc. agreed to be acquired by Brookfield Asset Management Inc.


Our outlook is little changed from the prior quarter as we look around the globe at real estate fundamentals and see a continued positive environment with job growth driving demand, and supply remaining at or below long-run averages in most sectors and cities. This should support property values, but where stock prices are not rising in tandem, we expect to see management teams look to M&A and other methods to create value to close the gap between public and private valuations. That theme continued again this quarter with further M&A expected as long as property stocks trade at a discount to private market valuations.


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