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Clarion Global Real Estate Market Commentary Q3 2016
Clarion Global Real Estate Market Commentary Q3 2016
MARKET COMMENTARY
Q3 2016
EXECUTIVE SUMMARY
GLOBAL REAL ESTATE STOCKS ARE UP 10% THROUGH SEPTEMBER
Real estate shares moved higher during Q3 to finish up over 10% yearto-date through September. Property companies have outperformed
broad equities and bonds year-to-date with performance underpinned
by attractive dividend yields and stable earnings growth.
REAL ESTATE EARNINGS AND VALUES CONTINUE TO GROW
We expect third quarter earnings to come in largely as expected as a
bottom-up view of the world through the lens of property company
earnings indicates that the real estate business is relatively healthy.
Real estate fundamentals are strong as a result of stable to improving
occupancies, higher rents, and active transaction markets.
GLOBAL PROPERTY STOCKS OFFER PROSPECTS FOR POSITIVE
TOTAL RETURN OVER THE NEXT 12 MONTHS
We have a positive outlook for global real estate. We expect global
property companies to continue to attract investors seeking dividend
yield supported by stable earnings growth in a low growth world. With
dividend yield in ~4% range globally, and earnings growth in the 6%
range this year and next, listed real estate companies are well positioned
in a low interest rate, moderate growth economic environment.
Subdued development starts, a low inflation environment, and a wide
spread between initial yields on real estate and high quality bonds
should support investor demand for real estate.
U.S. REITS BECAME THE 11TH GICS (GLOBAL INDUSTRY
CLASSIFICATION STANDARD) SECTOR ON SEPTEMBER 1ST
Equity REITs reached an important milestone on September 1st when
they moved from the Financials Sector of the GICS classification
standard into a new 11th sector called Real Estate. GICS is the leading
global listed equity classification system, maintained by S&P Dow Jones
Indices and MSCI, Inc. and, as such, is a significant acknowledgement
by leading index providers that real estate investment trusts deserve a
distinct representation among the now eleven major equity groups. By
becoming a standalone sector, U.S. REITs will demand a more visible
asset allocation decision by institutional investors who will have to be
more specifically dedicate resources to cover the sector. We believe
that this will be positive for REIT demand over time.
cbreclarion.com
Exhibit 1:
Global Real Estate Securities
Performance as of September 30, 2016
Q3 2016
1.3%
1 Year
14.9%
3 Year
7.7%
5 Year
12.3%
7 Year
10.0%
10 Year
3.4%
22.9%
20.0%
20%
19.3%
16.6%
15.8%
13.5%
15%
10.5%
10.2%
8.4%
10%
6.1%
4.1%
5%
1.9%
1.3%
0.6%
0%
-0.1%
-1.1%
-5%
-4.6%
-10%
-15%
-20%
-20.1%
-25%
Hong Kong
Cont. Europe
Singapore
United Kingdom
Australia
Q3 2016
Japan
United States
Canada
World
YTD
Source: FTSE EPRA/NAREIT Developed Index - Net of withholding taxes in USD as of 09/30/2016. Please refer to the last page for index performance in other major currencies. An index is
unmanaged and not available for direct investment. Past performance is no guarantee of future results.
MARKET OUTLOOK
GLOBAL PROPERTY STOCKS CONTINUE TO OFFER PROSPECTS FOR POSITIVE TOTAL RETURN
Real estate companies offer many investment attributes currently desired by investors, including attractive cash flow and dividend
yields, stable underlying earnings growth, conservative and well-managed balance sheets, and a strong bid by private capital
seeking for hard assets. We believe that global property companies will generate positive total return of 5-10% over the coming
twelve months. Positive yet sluggish economic growth combined with historically low long-term interest rates bodes well for real
estate and real estate securities versus other asset classes. The slower pace of economic activity, subdued development starts, a
low inflation/low interest rate environment, and a wide spread between initial yields on real estate and high quality bonds should
support investor demand for real estate. Central bank policy will remain accommodative, including the U.S. Federal Reserve Bank
which we expect to raise policy rates only after seeing a very consistent stream of positive economic data. We expect continued
monetary stimulus to help mitigate any economic slowdown. Listed property company earnings will generally be unaffected in this
environment, with stable to improving occupancies, higher rents, and active transaction markets.
The Brexit referendum vote has caused global economic forecasts to be revised modestly down from already sluggish levels as
the Brexit impact is largely a UK, and to a lesser extent Continental European, phenomenon. Economic projections elsewhere
have been negatively impacted, particularly in Continental Europe. Economic impact beyond Europe however is expected to be
minimal. While risks have become more elevated in the aftermath of the Brexit vote, we continue to believe any meaningful
volatility creates a potential opportunity to buy high quality real estate companies with visible earnings at discounted prices.
Exhibit 3: GDP Growth Forecast
8
2015
2016F
2017F
6
2018F
LT Average
-2
-4
Eurozone
China
Australia
World
UK
USA
Canada
Japan
Hong Kong
Singapore
Brazil
10%
9.6% 9.6%
8.5%
8.0%
7.3%
7.1%
6.2%
5.6%
5%
0%
Americas
Asia-Pacific
2016 Forecast
Europe
World
2017 Forecast
Source: CBRE Clarion as of 09/30/2016, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts
and any factors discussed are not indicative of future investment performance.
4%
2%
0%
-2%
Dividend Yield
Current Spread
Historical Spread
Canada
Australia
Singapore
Cont. Europe
United Kingdom
United States
Hong Kong
Japan
5.5%
4.5%
3.3%
4.6%
2.7%
1.1%
4.5%
2.7%
0.1%
4.1%
3.9%
-0.1%
3.7%
3.1%
-1.6%
3.6%
2.0%
1.1%
3.5%
2.6%
-1.6%
2.5%
2.5%
-0.8%
Source: CBRE Clarion, FactSet and Bloomberg as of 09/30/2016. Not all countries included. Historical spread is from 1990 for all countries except: Canada is from June 1994 and
Singapore is from June 1998. Past performance is no guarantee of future results. Yields fluctuate and are not guaranteed. This information is subject to change and should not be
construed as investment advice.
10%
5%
0%
-5%
Hong Kong/
China
Continental
Europe
United
Kingdom
United
States
Singapore
Japan
Australia
Canada
Global
Average
2015e
-1.8
8.1
13.8
8.1
2.9
6.5
6.0
4.2
6.6
2016f
10.3
8.6
6.2
5.9
5.7
5.4
1.9
0.5
6.4
2017f
8.0
4.9
4.5
6.4
2.9
5.6
4.6
1.3
6.1
Source: CBRE Clarion as of 09/30/2016. Information is the opinion of CBRE Clarion , which is subject to change and is not intended to be a forecast of future events, a guarantee of
future results, or investment advice. e refers to estimates. f refers to forecasts. Forecasts and the factors noted are not indicative of future investment performance.
LISTED REAL ESTATE REMAINS ATTRACTIVELY VALUED VERSUS PRIVATE MARKET REAL ESTATE, PARTICULARLY IN U.S.
CORE PROPERTY TYPES
Listed property companies at September 30th traded at an estimated 5% discount versus the private market estimated net asset
value (NAV). The implied global weighted average cap rate of 5.6% compares favorably to fixed income alternatives and a cost
of capital which remains historically low. In the U.S., the modest premium is driven by pricier net lease, health care and date
center property types while the core real estate sectors of apartments, retail, office, industrial, and lodging remain at a discount
to our estimate of private market value. The U.K. majors, with significant portfolios concentrated in London, continue to trade at
discounts exceeding 15% post Brexit. Implied cap rates for many of the U.K. majors are in the 5% range. Many Asian developers
trade at over a 35% discount to NAV, materially below their long-term averages with implied cap rates in many cases exceeding
6%. A key observation and insight globally is that cap rates have remained low given negative policy rates, low bond yields, low
levels of inflation and wide spreads between cap rates and the cost of capital. A significant amount of dry powder from investors
in the private markets, including private equity, pension funds and sovereign wealth, too, is underpinning cap rates. Over $200
billion of estimated dry powder remains available in the U.S. alone for prospective investment in commercial property, before
taking into account any leverage.
Exhibit 7: NAV Premium/Discount by Region
10%
10 Year Average
Current NAV Premium / Discount
6%
4%
5%
5%
2%
-1%
-5%
-5%
-4%
-5%
-10%
-10%
-10%
-10%
-15%
-15%
-20%
-20%
-20%
0%
0%
10%
-25%
-25%
-26%
-30%
-30%
Continental
Europe
Canada
United
States
All Sectors
Australia
United States
"Core"
Sectors
Global
Average
Singapore
United
Kingdom
Japan
Hong Kong/
China
Information is the opinion of CBRE Clarion as of 09/30/2016, is subject to change and is not intended to be a forecast of future events, or a guarantee of future results, or investment
advice. Forecasts and any factors discussed are not indicative of future investment performance.
REAL ESTATE COMPANIES CAN PERFORM WELL IN THE FACE OF RISING INTEREST RATES
While a short-term move higher in interest rates typically can cause short-term dislocation among yield-sensitive asset classes,
including the listed property company sector, history suggests that property company shares ultimately benefit from the underlying
forces that cause rates to move higher, namely positive economic growth. When examined more closely globally, evidence is
such that property shares generally perform well in a capital markets environment with higher bond yields. The following chart
shows the 12-month performance in U.S. property shares during periods in which U.S. interest rates rise and fall. While the
positive returns during periods of rising interest rates may buck conventional wisdom for some, the favorable performance is not
surprising given that improving economic conditions also tend to lead to improvement of the revenue line for owners/operators
of commercial property and that this over time typically more than offsets any increase in debt expenses.
Exhibit 9: REIT Performance in a Rising Interest Rate Environment
Average 12-month Performance of Real Estate Securities versus other Asset Classes, December 31, 1994 September 30, 2016
U.S. 10-Year Rates Falling
<-50 bps
-50 to 0 bps
0 to +50 bps
>50 bps
Real Estate
13.2%
Real Estate
25.2%
Global Equity
22.6%
U.S. Equity
10.1%
Global Equity
17.7%
U.S. Equity
22.1%
Global Equity
8.2%
U.S. Equity
16.7%
Real Estate
21.0%
U.S. Equity
2.6%
Real Estate
-0.2%
Global Equity
-1.8%
Note: Performance shown represents the average 12-month total return for each asset class shown when bond yields moved by the amount indicated at the top of each column.
Source: CBRE Clarion as of 09/30/2016 in USD. Real Estate, Global Equity, U.S. Core Bonds, U.S. Equity, U.S. High Yield Bonds, U.S. Corporate Bonds represented by FTSE EPRA/
NAREIT Developed Index, MSCI World Index, Barclays U.S. Aggregate Bond Index, S&P 500 Index, Barclays U.S. Corporate High-Yield Index, Barclays U.S. Corporate Investment Grade
Bond Index, respectively. Information is the opinion of CBRE Clarion, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or
investment advice. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
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