Monthly Briefing
Market | Portfolio update
08 | 2022
Until mid-August, market recovery continued but was sharply interrupted by incoming inflation figures which were higher than expected.
Thus, lingering expectations that future interest rate hikes could be more moderate, disappeared. Especially Fed’s brake on the US economy to cool inflation was the key driver in global markets. So, stock exchanges came under selling pressure and all markets closed lower than a month before. Led by the Nikkei with a minus of -1.45 percent, the S&P 500 followed with -2.71 percent. The Eurostoxx 50 Index ended for the third month in a row at the third place with -5.09 percent (all figures in EUR).
This month global REIT markets have performed slightly weaker than the broader equity markets. Best region was Asia with a decrease of -2.31 percent, followed by North America with -4.82 percent. Europe came in last with -10.79 percent. Overall, the EPRA Global REIT Index decreased -4.90 percent last month (all figures in EUR). The UK REIT index was down -12.93 percent last month and is now still roundabout 360 basis points behind the European REIT index so far this year.
Our model portfolio, which strategy is also followed by our “QSF-DeA Global REITs” fund, closed August with a loss of -6.16 percent, thanks to the international orientation. (For information: The Fund performance since launch is positive by end of August). This results in a performance for the year of -11.16 percent, which is not too far behind the performance of the global REIT index which is at -8.10 percent. But more important, it was able to achieve a dividend yield of +5.23 per cent (gross without withholding tax) so far this year which is more than 150 bps higher than the yield of the Global REIT index.
In August, all sectors showed negative performance, but in contrast to all other months this year so far, there was no clear differentiation between the sectors. The best performing sector was lodging/hotels with -3.0 percent and the worst was office with -7.7 again. All other stuck very closely to each other within this band. The main reason for the lagging performance of office was the rising concern that remote working will be crucial to office demand during next winter. If it triumphs over the office, vacancy may soar and therefore dampen down rental income. Only prime, low-carbon offices that can raise rents may withstand a value decline in the following months.
Strong tenant demand for warehouses is sustaining rent and net-operating-income growth at these properties, but economic uncertainty and rising interest rates add uncertainty regarding share-price performance for logistics/industrial REITs. But up to now the dynamic in rental growth is still ongoing. Especially in the US, industrial REITs are on track to boost same-store NOI faster than last year. In Europe, growth from rapid development and inflation-linked rent may be offset by rising yields that threaten asset values.
For the retail REITs the picture has not really changed. After a brief rebound, a revival in retail REITs is drooping amid the threat of recession and higher interest rates. Tenant distress pressures on non-food related REIT values. Food related retail REITs still appear better positioned for stronger rent growth in the following months.
Currently REITs face a more difficult situation as access to capital is heavily discounted and borrowing costs are rising, leaving asset rotation as the only viable option to fund upgrades while keeping leverage low enough to withstand shocks. But especially in Europe discounts to net assets already assume declines of 10-50% in underlying property values, which should be a high enough buffer for most risk scenarios. Additionally, index-linked rent increases can mute value declines. 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.
Quantitative tightening by the US central bank, set to kick into gear next month, will be another risk for markets. But as indicated last month the slower economic growth expectations may force central banks to rise interest rates not too high. This will support equity markets but nevertheless growth this year will be lower than expected.
With more than 5.2 percent collected dividend yield so far, we have already surpassed our forecast of a dividend yield of 4.0 to 5.0 percent for the whole year 2022. Other factors like high inflation, the higher interest rates and the lower economic growth will last for the rest of the year. Volatility is high and market developments are completely data driven, but nevertheless we still believe that the total return for 2022 could be positive overall.
For more information about our DeA Global REIT’s fund, performance, opportunities and investment opportunities, please contact us or visit deacapitalregermany.eu/dea-global-reits-fonds.
Your contact persons
Dr. Thorsten Schilling
Thorsten.Schilling@deacapital.com
+49 69 50602 6700
