Monthly Briefing
Market | Portfolio update
06 | 2022
In June stocks all over the world fell amid ever-louder warnings that central banks monetary tightening may lead to an economic downturn.
Stocks fell along with futures and commodities amid ever-louder warnings that central banks rate hikes may lead to an economic downturn. At the same time, many households are unsettled by the sharp rise in inflation and the environment of rising interest rates. On the supply side higher energy costs and persisting supply chain constrains were not supportive as well. As a result, none of the regions were able to show gains in June as they did in May. Led by the Nikkei with a minus of -6.01 percent, the S&P500 followed almost equally with -6.08 percent. The Eurostoxx 50 Index performed slightly worse with -8.74 percent (all figures in EUR).
REIT markets have outperformed broader equity markets last month, mainly driven by the two regions Asia and North America which declined -5.05 percent and -5.41 percent correspondingly. Last month, Europe was lagging behind by far with -13.12 percent as war in Ukraine and the fear of a possible recession burdened on market sentiment. Overall, the EPRA Global REIT Index declined -6.09 percent last month (all figures in EUR). The UK REIT index was down -11.56 percent last month and is now 200 basis points behind the European REIT index.
Our model portfolio closed June with a decline of -11.57 percent. This results in a performance for the year of -14.78 percent, which is quite in line with the performance of the global REIT index which is at -13.30 percent. In addition, it was able to achieve a dividend yield of +3.81 per cent (gross without withholding tax) so far this year.
In June, all sectors performed negative, but data centers, specialty(Infrastructure etc.) and healthcare have been the less vulnerable. On the other side, lodging, office and mixed used office/industrial have been worst hit last month. Office values came under pressure as reduced liquidity amid rising interest rates added to concerns over demand for the asset class, but we believe the drop in REIT shares is overstating the risk. Unlike during the great financial crisis, office cash flow and financing have held up well, helping support asset values and minimize landlord distress.
Increasing investment activity by health-care REITs helped to fuel a rebound in earnings growth in 2022. Mostly all health-care REITs continued to invest in acquisitions and developments despite macroeconomic headwinds, which will help support profit growth in 2023 as well. Healthcare REITs, despite rising interest rates, were outperforming last month as they saw growing funds from operations.
Strong demand and leasing confidence have led data centers and specialty REITs to extend their acquisition route in 2022. Together with vacancy at historic lows rental growth will be the dominant FFO driver for 2023.
Rising interest rates and market declines may keep REIT debt and equity issuance lower year-over-year in 2H, as many companies took advantage of low rates to refinance debt in 2021 and balance sheets are broadly in better shape than during the financial crisis. These factors may curb near-term portfolio growth, yet REITs are an inflation hedge as their rental contracts typically contain inflation indexation clauses. For that reason, we still prefer the more conservative sectors Industrial, data center and healthcare as they typically have long-term inflation linked rental contracts which should provide protection in the short-term as well.
The war on Ukraine has driven up energy costs, lifting prices faster than wages. This is a squeeze on consumer spending power. Tighter financial conditions will further reduce growth for the rest of the year in comparison to earlier expectations.
Having collected more than 3.8 percent as dividend yield in the first half of the year, we are still confident to reach our forecast of a dividend yield of 4.0 to 5.0 percent for the whole year 2022. Other factors like high inflation, more interest hikes and lower economic growth will last longer than expected, but currently we still believe that the total return for 2022 should positive overall.
Your contact persons
Dr. Thorsten Schilling
Thorsten.Schilling@deacapital.com
+49 69 50602 6700
