Monthly Briefing
Market | Portfolio update
09 | 2021
The global equity rally has stalled at the end of the third quarter, as investors worry about surging energy costs and therefore higher inflation and that supply chain problems may persist longer than expected. At the same time central banks are laying down plans to withdraw some of the pandemic stimulus.
In the U.S. ongoing discussions about Biden’s infrastructure program and a possible shut down of the government were in the headlines.
In Asia, it is the Chinese government’s increasing regulatory interventions in many sectors that are weighing on the economy. Important leading indicators for the economy, such as the purchasing managers’ indices, have already fallen below the expansion threshold. The massive problems at the second-largest real estate developer Evergrande are adding to concerns about a broader debt problem in the real estate sector, which accounts for around 25% of GDP.
In Europe, vaccination progress is flattening but most countries have further lowered their restrictions to support the recovery of the service sector (non- essential retail and hospitality). Nevertheless, high inflation which may persist longer has risen the probability that the ECB may abandon its loose monetary policy earlier than expected. In September the Nikkei gained +6.15 percent, followed by the S&P 500 which was down -2.71 percent and by Europe (Eurostoxx50) with a decrease of -3.37 percent. For the first nine months of 2021 this results in a gain of +22.46 percent for North America and +16.50 percent for Europe, while Asia (Japan) is less dynamic with an increase of only +7.08 percent (all figures in Euro).
Inflation concerns led to rising interest rates in nearly all regions, causing negative price reaction for REITs and listed real estate as these instruments are often seen as bond proxies. So, real estate markets underperformed the broader markets in September. Overall, the EPRA Global REIT index lost -3.78 percent last month. For the first time this year Asia was the best performer but still with a decrease of -1.78 percent, followed by the US with a decrease of -3.67 percent, while Europe was worse with a loss of -8.38 percent.
Therefore, the overall performance figures for the first three quarters showed the following ranking: first in class North America +29.91 percent, second place Europe with +14.86 percent, followed by Asia with +11.84 percent (all figures in EUR).
The UK REIT index outperformed the European REIT Index by 4.60 percent in September and for the whole year it is leading with nearly 600 basis points.
Our model portfolio ended September with a loss of -4.39 percent. So, the overall performance for the first three quarters of 2021 summed up to +14.63 percent. It also realized +4.73 percent dividend yield this year so far (gross without withholding tax). Within the portfolio residential and industrial/ logistic REITs have finished the first nine months of 2021 as best performers. Shortage of supply(residential) and rising demand (ecommerce) are the main reasons for that development. Office REITs were flat last quarter, as it is still unclear to which extent further office space is needed as working from home is on the rise and other space requirements (e.g., flex space) may be requested by the tenants.
The comeback of retail REITs came to a halt within the third quarter and for the first time this year the performance of industrial REITs is ahead of retail. We are still cautious and will not actively expand our exposure into retail at the current stage, as there are still open questions how retail will develop in the next months. Malls or shopping centers with a high proportion of food related tenants will do better, but other tenants will reduce their space or will transform some of it into storage (multi-channel approach) with lower rents. So lower occupancy and lower rental income will be an ongoing burden in this sector for the months to come.
Overall self-storage is still the best performing sector this year, while data centers and diversified REITs are lagging but still with double digit growth rates. Having said that, data centers will be the sector to watch in the coming months as increasing M&A activities are likely because demand remains strong as investors seek to build bigger portfolios.
The pandemic is not over, the supply chain bottlenecks we are seeing are affecting all sorts of prices and we’ll need to see how it plays out because the results are not clear in terms of inflation. Nevertheless, we are confident that our forecast of a dividend yield of 5.0 to 6.0 percent and a total return of 12 to 15 percent for 2021 will be reached.
Your contact persons
Dr. Thorsten Schilling
Thorsten.Schilling@deacapital.com
+49 69 50602 6700
