This edition of CIO Weekly Perspectives comes from guest contributors Steve Shigekawa, Gillian Tiltman, Brian Jones and Anton Kwang of Neuberger Berman’s Real Estate Securities Group.
Listed real estate securities have enjoyed a very good 2019. The FTSE NAREIT All Equity REITs Index is up almost 30% year-to-date, outpacing the S&P 500 and most other big-hitting asset classes such as gold and long-dated Treasuries.
Is this due to the sector’s interest rate sensitivity?
People often see listed real estate as a “defensive” income-generating sector that benefits when yield-seeking investors are trying to escape declining rates—and that has certainly played a part in this year’s returns.
But it’s not the whole story.
In fact, the real estate subsectors that have outperformed the most—datacenters, cellular towers, manufactured housing, single-family rentals and industrial/warehouse—generate total returns that are generally driven more by earnings growth and price appreciation than by income.
In short, investors’ search for growth has been at least as important for this year’s real estate outperformance as their search for yield.
The growth opportunity in the sector is getting bigger and more important with every passing year.
Widely recognized long-term investment themes feed directly into real estate opportunities in underappreciated ways.
The advent of 5G is likely to increase demand for cellular towers and fiber cable assets. Cellular towers are also set to play a major role in making next-generation mobility a reality. The spread of cloud computing will require more datacenters. Later-starting families are increasing demand for single-family, non-owner-occupied housing. And resource efficiency is becoming an ever-more-important quality differentiator across real estate assets in general, while timberland in particular is exposed to themes of climate change and sustainability.
Even e-commerce, so often seen as a pure threat to retail real estate, is creating huge new demand for warehouses and last-mile distribution centers.
Back in 2000, nontraditional assets such as these made up less than 10% of the FTSE NAREIT All Equity REITs Index. They now account for around half.
As regular readers of Perspectives will know, over recent weeks there has been a major reversal of some longstanding trends in financial markets. Investors have rotated out of perceived growth-oriented, income-generating defensive stocks and into value-oriented and cyclical stocks.
Listed real estate has been impacted by this reversal, and the growth-oriented subsectors described above lagged as investors chased beaten-up value stocks.
But we believe there are much stronger trends at work here than the ebb and flow of equity market style rotations. What is more, large blocks of investor capital are beginning to recognize the importance of this opportunity.
We see private equity managers increasingly compete for real estate and infrastructure assets, especially technology infrastructure. The world’s largest REIT exchange-traded fund changed its index last year to one that includes cellular towers and timberland: Its two largest holdings are now owners of communications infrastructure. The world’s largest active real estate securities manager made a similar change to its benchmark in March.
You may be looking at listed real estate and thinking that it’s already had too good a run this year, and that the recent pullback is symptomatic of an overstretched trend. Or you may be thinking that this interest-rate-sensitive asset class is vulnerable to a further rise in bond yields.
We think both of those assumptions could obscure the genuine story in listed real estate—a growth story that we believe has many years yet to play out.
In Case You Missed It
- U.S. Purchasing Managers’ Index: +0.7 to 51.0 in September
- Euro Zone Purchasing Managers’ Index: -1.5 to 50.4 in September
- Japan Purchasing Managers’ Index: -0.4 to 48.9 in September
- S&P Case-Shiller Home Price Index: July home prices increased 0.1% month-over-month and 2.0% year-over-year (NSA); flat month-over-month (SA)
- U.S. Consumer Confidence: -9.1 to 125.1 in September
- U.S. New Home Sales: +7.1% to SAAR of 713,000 in August
- U.S. 2Q 2019 GDP (Final): +2.0% annualized rate
- U.S. Durable Goods Orders: +0.2% in August (excluding transportation, durable goods orders increased 0.5%)
- U.S. Personal Income and Outlays: Personal spending increased 0.1%, income increased 0.4% and the savings rate increased to +8.1% in August
What to Watch For
- Monday, 9/30:
- China Purchasing Managers’ Index
- Tuesday, 10/1:
- ISM Manufacturing Index
- Euro Zone Consumer Price Index
- Thursday, 10/3:
- ISM Non-Manufacturing Index
- Friday, 10/4:
- U.S. Employment Report
– Andrew White, Investment Strategy Group
Statistics on the Current State of the Market – as of September 27, 2019
|S&P 500 Index||-1.0%||1.4%||19.9%|
|Russell 1000 Index||-1.1%||1.2%||19.9%|
|Russell 1000 Growth Index||-1.5%||-0.7%||22.4%|
|Russell 1000 Value Index||-0.6%||3.3%||17.5%|
|Russell 2000 Index||-2.5%||1.9%||14.0%|
|MSCI World Index||-0.9%||2.0%||17.9%|
|MSCI EAFE Index||-0.6%||3.3%||13.7%|
|MSCI Emerging Markets Index||-1.9%||2.0%||6.3%|
|STOXX Europe 600||-0.8%||2.7%||14.1%|
|FTSE 100 Index||1.1%||3.2%||14.5%|
|CSI 300 Index||-2.1%||1.5%||30.9%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.2%||-0.1%||3.0%|
|Citigroup 10-Year Treasury Index||0.8%||-1.4%||10.8%|
|Bloomberg Barclays Municipal Bond Index||0.3%||-0.8%||6.7%|
|Bloomberg Barclays US Aggregate Bond Index||0.4%||-0.6%||8.5%|
|Bloomberg Barclays Global Aggregate Index||0.1%||-0.9%||6.4%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.2%||0.6%||8.2%|
|ICE BofA Merrill Lynch U.S. High Yield Index||-0.3%||0.3%||11.5%|
|ICE BofA Merrill Lynch Global High Yield Index||-0.4%||0.4%||10.1%|
|JP Morgan EMBI Global Diversified Index||-0.5%||-0.4%||13.0%|
|JP Morgan GBI-EM Global Diversified Index||-0.3%||1.2%||8.1%|
|U.S. Dollar per British Pounds||-1.5%||1.1%||-3.3%|
|U.S. Dollar per Euro||-0.6%||-0.6%||-4.2%|
|U.S. Dollar per Japanese Yen||-0.2%||-1.9%||1.4%|
|Real & Alternative Assets|
|Alerian MLP Index||-3.5%||0.3%||10.7%|
|FTSE EPRA/NAREIT North America Index||1.1%||2.7%||25.6%|
|FTSE EPRA/NAREIT Global Index||0.6%||2.3%||19.3%|
|Bloomberg Commodity Index||-1.0%||1.9%||3.9%|
|Gold (NYM $/ozt) Continuous Future||-0.6%||-1.5%||17.6%|
|Crude Oil (NYM $/bbl) Continuous Future||-3.8%||1.5%||23.1%|
Source: FactSet, Neuberger Berman.