#Real Estate — 12.01.2016


Pol Tansens

We saw wide disparity in REIT prices last year. Find out our views on differentiated total returns and prospects for 2016

REIT performances were not always positive in 2015. Europe - and in particular Continental Europe - was the top performer in euro (+ 16.4%) whereas North America came to a standstill (in dollar). Furthermore, Asia registered losses of up to 7.2% in local currency (Japan). So we experienced a wide disparity in REIT prices last year, and we believe we could have some explanation for the differentiated total returns:

1. REITs could be considered as (indexed) investment-grade corporate bonds, certainly in Europe and North America. In Europe, the correlation with bonds has been as high as 80% in the past three years (source: EPRA). Consequently, monetary policy implemented by the European Central Bank is partially responsible for the good performance in Europe. Indeed, the ECB's policy is still accommodative, leading to very low short-term interest rates (and low long-term rates as well, although a central bank has less impact on long-term rates). This is somehow ironical. The continent that suffered most from the crisis in the past - with a still fragile recovery ahead - performed best in 2015. After all, investors seem to focus on the 200bp spread between long-term "risk-free" rates and gross dividend yields, whether this is justified or not.



2. The monetary policy is diverging across the world. In the U.S., the Federal Reserve raised its benchmark rate by 25bp in December 2015, for the first time since 2006! And of course other interest rate hikes may follow this year, in contrast to Continental Europe and Japan, where monetary policy is still loose. We think this is the main reason why U.S. REITs have been lagging their European counterparts. In particular, institutional investors have been anticipating the latest move of the Fed, partly selling their liquid REITs.                                                                                                                                                                             3.


3. Asia is a story of a different sort, with China going through some economic turmoil. Whether the declining local stock market is a proxy for the health of the underlying economy (in terms of private consumption, investments, etc.) is subject to debate. Yet the turmoil adds to the "overall uncertainty", with spill-over effects to neighbouring countries (including Japan). Asian REITs were not spared either in 2015, with Australia being the exception.



What are the prospects for 2016?


We believe further interest rate hikes in the U.S. could force investors to ask for higher returns eventually, resulting in higher cash yields based on lower share prices. Much will depend on the pace real interest rates were to rise at. In Europe, monetary policy should in principle still be supportive for REIT share prices, though global capital markets are interactive. Therefore, higher interest rates in the U.S. could have a dampening effect on European REITs as well. We stick to our forecasts that total returns across Europe should hover around gross dividend yields. In Asia, market volatility may continue, and this could lead to new buying opportunities in due course. Overall, we think 2016 may be more challenging for REIT investors in general.





* Real estate securities (REITs) provide investors with a liquid way to access property assets without having to buy property directly. A real estate security is a share of a company or trust, privately held or listed, that manages a portfolio of income-producing properties, such as shopping malls, office buildings, apartments...