Market | Portfolio update
10 | 2022
Investor sentiment improved in October and markets finished the month in positive territory.
It was all about rising interest rates and recession fears that weighed on markets until mid of October. But then sentiment changed as reports came up according to which several central banks especially the FED are considering a less hawkish pace. Also supportive: the falling yields on government bonds and the significant decline in the price of gas. So, stocks rebounded, and all markets closed significantly higher than a month before. Again, it was Europe which did best the second month in a row with a plus of +9.12 percent, followed by North-America where the S&P 500 gained +7.04 percent. The Nikkei Index closed with +2.55 percent (all figures in EUR).
The positive development was also reflected by the global REIT markets with the exemption of Asia. Overall, the performance was weaker than the broader equity markets. Best region was Europe with a gain of +5.55 percent, followed by North America with +3.60 percent. Asia came in last as the only region with a decline of -1.32 percent. Overall, the EPRA Global REIT Index increased +2.88 percent last month (all figures in EUR). The UK REIT index was up +5.44 percent last month and is now roundabout 510 basis points behind the European REIT index so far this year.
Our model portfolio and our “QSF-DeA Global REITs” fund also ended October with positive performance. Our model portfolio recorded a gain of +5.92 percent (significantly higher than the Global Index last month), resulting in an annual performance of -18.21 percent, which is behind the performance of the global REIT index at -14.93 percent, but the difference is decreasing. The performance of our fund “QSF-DeA Global REITs” has outperformed all regions last month and recorded an overall performance of -5.53 percent since its inception. Nevertheless, our approach aimed at long-term stable dividend payments is confirmed: so far this year, we have achieved a dividend yield of +6.27 percent (gross excluding withholding tax), which is 160 basis points above the yield of the Global REIT Index.
In October, most sectors showed positive performance. The best performing sectors were lodging/resorts with +15.66 percent and retail with +9.85. The worst was residential with -2.98 percent. The main reason for the lagging performance of residential especially in the US was the rising concern that higher interest rates could dampen down demand.
While the good performance of lodging was mainly due to technical reasons, as market participants saw the valuation gap in comparison to other sectors as too high, the good performance of retail REITs came in quite surprisingly. Yes, rebound in cash earnings is backed by tenant sales exceeding 2019 levels in 3Q, strong leasing and higher occupancy in most regions. But inflation will weigh on both tenants and consumers until stability returns leading to a tough 2023 that may linger into 2024.
Office REITs remain stable in October, as transactions in major offices markets dried up significantly in 3Q in major markets and were no clear indications where values should be. A positive is that green offices may attract a premium of as much as 25% compared with second-class assets. This may moderate the fall in portfolio value for office REITs that have a high percentage of ESG-rated buildings.
Industrial and datacenter, which are among the most preferred sectors in our portfolio, showed positive performance as well. This was mainly due to the fact that rental contracts are long-term and inflation-linked, therefore providing some buffer to the negative yield effect on property values. That’s the reason why we stick to our conservative allocation with overweights in sectors like industrial, data center and healthcare.
Market developments will be data driven in the coming months as the central banks will adjust their actions on behalf of further rate hikes according to incoming economic figures. Further quantitative tightening by the major central banks is an ongoing risk for markets. But as already mentioned the slower economic growth expectations may force central banks to rise interest rates not as high as feared right now. This will support equity markets but nevertheless growth this year will be lower than expected due to adverse factors like high inflation and higher interest rates will be a burden for the next months.
Our approach, which aims at long-term stable dividend payments, has already achieved a dividend yield of +6.27 percent (gross excluding withholding tax) so far this year and is 160 basis points above the yield of the Global REIT Index. We have thus far exceeded our forecast of 4.0 to 5.0 percent for the full year 2022. For more information about our “QSF-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
+49 69 50602 6700