Global Public Equity – Quarterly Review


After a wild ride downward to end 2018, we took a wild ride back up to start 2019, as fears about the US Federal Reserve Bank (the “Fed”) tightening and a prolonged trade war abated

The main news event during the quarter was the Fed’s dovish pivot, as it committed to taking a pause from raising interest rates. The European Central Bank (the “ECB”) also made dovish moves after it lowered its growth forecasts substantially following weak economic data out of France and Germany. This caused interest rates to decline around the globe, which provided strong support for property stocks.

The dovish tilt by the Fed, along with more positive sentiment regarding the US-China trade talks helped buoy Hong Kong as the best-performing region for real estate securities during the quarter. Japanese property stocks were the laggards during the quarter despite being up nearly 10%.

While property fundamentals remain solid across the globe and most property types, retail continues to suffer the effects of retailer bankruptcies and the growth in e-commerce. We expect this to continue as retailers work through their debt issues and rationalize store space in the new world of e-commerce. We also expect the trend to continue where retailers are focusing their footprints on prime malls and shopping centers over secondary and tertiary locations, suggesting that high-quality retail real estate is still relevant.

While slowdown in the economy has prompted many to call for a recession, we do not share that outlook. Instead, we see a return to the low-growth, low-inflation environment that we have observed for much of this cycle. 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.

Regional Overview



The Asia-Pacific region had both the strongest-performing country during the quarter in Hong Kong, and also the weakest-performing in Japan, though the latter was still up nearly 10% in USD terms. Several events seemed to cause the strong performance, including expectations for more policy easing in China, a more cooperative tone to the US-China trade talks, a dovish pivot by the Fed, plus a strengthening renminbi. These all contributed to the risk-on sentiment. Also, after the sharp drop to end 2018, the start of 2019 saw laggards experience a sharp reversal upward, especially for interest-rate-sensitive areas like Hong Kong, as well as for developers in Japan and Singapore.

In Australia, weak economic data is fueling speculation that the next move of the Reserve Bank of Australia will be to lower interest rates. This is being reflected in rates, as the Australia 10-year yield reached the lowest reading ever on the second-to-last day of the quarter. As a result, we are more positive on office and logistics over residential and retail.

Retail sales growth in Hong Kong continues to weaken from high levels, with a peak in sales possibly occurring this quarter if the trend continues. However, the office market in Hong Kong remains firm despite concerns of slowing demand from Chinese firms and forecasts of a slowdown from various market forecasters. With respect to retail, we are cautious on discretionary retail due to the slowing trend and tough comparisons faced this year. However, the improvement in the stock market and market sentiment, in general, could give a boost to consumers.

Tokyo continues to show robust fundamentals in both the office and residential markets. But, with a large amount of new supply coming to the office market starting later this year and into 2020, we expect the rate of growth to slow. As such, we prefer logistics and the hotel market, respectively due to the secular tailwinds of e-commerce and strong inbound tourism.

Europe and UK

European stocks had a strong first quarter, outperforming broader equities in the region but underperforming other property stocks elsewhere around the globe. Much of the performance can be attributed to declining interest rates, as the German 10-year bund yield declined into negative territory for the first time since 2016. The decline in interest rates was driven in part by weak economic data, and also by a more dovish stance at the ECB following a downgrade of their growth forecasts. While the Continental European domestic economy appears to be doing well, the manufacturing and export sectors of the economy, particularly in France and Germany, are signaling near-stagnation. France is also in disarray, as President Macron’s low approval rating and the country’s “Yellow Vest” protests are likely to have a negative impact on retail sales. We are negative on France property stocks as a result.

We expect the dovish ECB stance to support real estate stock, given solid fundamentals in all property types, excluding retail

Overall, however, we expect the dovish ECB stance to support real estate stock, given solid fundamentals in all property types, excluding retail. We also continue to see the same positive tailwinds for logistics that we have seen elsewhere around the globe. Additionally, we see further cap rate compression in prime Swedish, Spanish, and German office, due to strong like-for-like rental growth.

United Kingdom (UK) economic data was weak, with purchasing managers’ indexes (PMIs), business confidence, and retail sales slowing as the final Brexit deadline nears. The European Union (EU) gave the UK a small extension, but numerous votes for several Brexit scenarios in Parliament have continued to fail. Given the uncertainty, we continue to be neutral all potential Brexit scenarios to the best of our ability.

North America

The longest US government shutdown in history ended during the quarter, but it is not clear if there was much resulting negative impact on the economy. What is clear is that economic growth has been slowing, as the various PMI surveys continue to show a downward trend. However, job growth appears to be stable and inflation remains tame. After raising interest rates by 25 bps in December, the Fed made a clear dovish pivot to acknowledge the slowing growth and disappointing inflation data. This caused interest rates to decline and the three-month versus 10-year rates to briefly invert. Sustained inversions of the curve have been good predictors of impending recessions in the past, though there are still times when inversions do not signal recessions.

In notable real estate news, Cousin Properties Inc. acquired Tier REIT, Inc. in an all-stock transaction. The market responded negatively on the day of the deal, though we have a more sanguine view given the geographic overlap of the two portfolios.

With the strong returns during the quarter more than reversing the sell-off in December, we expect more normal returns going forward absent a significant change in fundamentals. With the exception of retail, where retailer bankruptcies continue, a steady Fed and steady fundamentals should continue to support REIT prices.

Further M&A is expected as long as property stocks trade at a discount to private market valuations


Despite the recent volatility, 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, but this slowdown should remain at levels that we have seen during 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 mergers & acquisitions (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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