Global Public Equity – Quarterly Review


The year ended on a wild note as stocks sank and volatility skyrocketed in the fourth quarter of 2018

All eyes were on the US this quarter, starting with a speech by Fed Chair Jerome Powell that was viewed as hawkish by the market as it included a discussion about the possibility of raising rates above the neutral rate, which would indicate the Fed would be deliberately slowing the economy. He also stated that the US was currently experiencing “a remarkably positive set of economic circumstances ,” even as market participants were acknowledging that the economic data had been slowing for much of the year. This caused a spike in the US 10-year Treasury yield and a decline in stocks. Stocks stabilized once rates settled down, or at least until the last Federal Open Market Committee meeting of the year. Markets were expecting a rate hike, but also a change in language that would suggest the Fed would be more willing to pause rate hikes in the face of weakening economic data. The Fed did not tilt as dovish the market had hoped and both yields and stocks declined sharply to end December. However, the decline in interest rates allowed property stocks to outperform broader equities around the globe.

In Europe, purchasing manager indices (PMIs) continued their decline to a level consistent with 1.5% GDP growth, which would pose downside risk to the consensus forecast of about 2%. In addition, the European Central Bank ended quantitative easing in December with cautious confidence as rate hikes are not expected until at least the summer. In the UK, the Brexit fight continues as Prime Minister Theresa May survived a vote of no confidence from her own Conservative Party and delaying a vote on the deal she made with the EU until early 2019.

In the Asia-Pacific region, Australia saw its housing prices fall for the first time in 28 years, which caused residential stocks to underperform their market. In Hong Kong, after years of robust price gains, the residential market might be peaking as interest rates reached cycle highs, causing concerns over the lending environment. Retail sales still continue to grow but at a slowing rate against tough comps from a year ago. Japan saw two mergers announced during the quarter, leading to speculation that more would occur, causing small and mid-cap stocks to outperform.

While concerns about the sustainability of the economic cycle are mounting, the outlook for growth in 2019 remains positive, albeit at lower levels than in 2018. We continue to see ample debt and equity capital for real estate assets, which should support property values and the property market cycle going forward.

Regional Overview



In Australia, we have seen a softening in the residential markets due to tightening measures from the Banking Royal Commission. This has caused housing prices to drop for the first time in 28 years, which makes us cautious on the outlook for housing. However, the office markets remain robust with growing rents and cap rate compression a continued theme, giving us a positive view of the Sydney office market. Retail sales data remains positive despite the slowing housing market, but we are seeing potential signs of cap rate expansion for lower quality assets.

The Australian office markets remain robust with growing rents and cap rate compression a continued theme

In Hong Kong, sentiment is low given concerns over the trade war between the US and China as well as rising interest rates in the US. This caused the Hong Kong Interbank Offered Rate (HIBOR) to reach levels not seen since before the financial crisis in 2008, raising concerns about the housing market that has been so robust this cycle. In a sign this market might be peaking, the government rejected a tender for a luxury residential site on The Peak because the bids by developers were too low. Retail sales continue to grow but at a slower rate due to difficult comparisons to the strong growth seen in the past year. The office market remains tight with low vacancies and positive rental growth, especially in Central and other core markets.

In Japan, the office market reached a low vacancy rate of 1.98%, the lowest since 2006 according to Miki Shoji. We also saw an uptick in merger and acquisition (M&A) activity during the quarter as NTT-SH Corp., a wholly-owned subsidiary of Nippon Telegraph and Telephone Corp., acquired NTT Urban Development Corp. and Orix Corp, acquired Daikyo Inc. We have been cautious on the logistics space much of the year due to new supply coming to the market, but our latest research suggests the market might be bottoming and set to expand again.

In Singapore, we have seen signs of stabilization in the residential market following the surprise tightening measures announced during the third quarter. Average selling prices have remained stable and developers have refrained from offering discounts to entice buyers. However, the appetite for new land projects is low which has caused property investors to look overseas for new investment opportunities. The hotel market remains robust given limited new supply and strong tourist arrivals, particularly from China.

Europe and UK

Eurozone area PMIs have continued to decline from their peak values earlier in 2018, but the levels still suggest positive economic growth going forward. However, protests in France and budget issues in Italy remain a concern to the continued expansion. With President Macron’s confidence levels at an all-time low, we are monitoring France closely. We expect fourth quarter GDP to be impacted by the various demonstrations across the country, which are also hurting retail sales. We continue to like the logistics sector due to secular tailwinds such as the growth in e-commerce, as well as prime office in Sweden on the back of strong like-for-like rental growth.

With President Macron’s confidence levels at an all-time low, we are monitoring France closely

In the UK, Brexit concerns are taking a bite out of confidence as companies are stockpiling inventories in anticipation of a hard Brexit scenario in the early part of 2019. This has negatively impacted PMIs, retail sales, and the housing market. Prime Minister Theresa May survived a vote of no confidence from her own Conservative Party. She now cannot be challenged for a year, but opposition parties could trigger a vote of no confidence against the government. Early in the quarter, retail landlord Intu Properties Plc received an offer for the company from a team of investors led by Brookfield Property Group. But at the end of November, the group withdrew from talks to take over the company and Intu dropped nearly 40% that day, signaling continued negative sentiment toward retail real estate.

North America

The US news flow was all about the Fed during the fourth quarter. The quarter started with perceived hawkish comments from Fed Chair Powell, which caused interest rates to briefly spike. As inflation expectation and economic data deteriorated throughout the quarter, the market was expecting the Fed to signal a pause in its rate hiking cycle during the December meeting. While the Fed signaled a slowdown in rate hikes following another raise of 25 bps, it was not enough to appease the markets, triggering a broad market selloff and nearing bear market territory (defined as a drop of 20% from the peak). This has reset expectations for much slower growth in 2019.

M&A activity continued, though, as Pebblebrook Hotel Trust completed its acquisition of LaSalle Hotel Properties and Brookfield Asset Management completed its acquisition of Forest City Realty Trust, Inc.

Despite generally healthy economic releases, concerns of a slowdown in Canada mounted as the price of crude oil fell and transport shortages pushed price differentials for Canadian oil to all-time highs. In early December, this led to the Government of Alberta mandating a province-wide cut of nearly 9% of daily oil production, hoping to drawn down inventories and reduce differentials back to normal levels. The problems in the oil patch, along with lingering uncertainty around trade, led the Bank of Canada to turn more dovish, exacerbating downward pressure on yields and the Canadian Dollar.

We expect to see management teams look to M&A and other methods to create value


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. We expect a slowdown in economic growth in 2019 compared to 2018, but it should remain at levels we have seen for much of this cycle. 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 given ample debt and equity capital looking at real estate.


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