Global real estate equities held up relatively well in a generally challenging period for stocks, reflected in flat to negative returns for major indexes. Markets broadly fell through the middle of the month, amid plummeting oil prices and lackluster economic data from the U.S., China and Europe. These trends reversed, however, sending equity and debt markets higher to mostly recover earlier losses. Meanwhile, investors continued to strive to find policy clarity in China, where officials sent mixed signals as to how they would address a slowing economy and fragile capital and currency markets.

U.S. REITs (–0.5% total return1) had a modestly negative overall return, although performance varied by property type. Hotels (7.6% total return2) were the best performers, rallying from depressed levels, even as room revenues continued to disappoint. Host Hotels was a standout, aided by an earnings report that exceeded expectations. Free-standing retail REITs also advanced, favored for their relatively stable and above-average dividend yields in a period of low and declining bond yields.

Self storage companies, by far the strongest performer over the past year, declined 3.6% overall. Despite some apparent profit taking, the backdrop for the sector remained strong, characterized by rising demand, limited new supply, and ample opportunities for expansion. Office REITs fell 2.6% after declining in January, reflecting concerns about employment trends in central business districts, in particular with regard to financial services tenants.

Regional mall companies (1.8%) had a modest gain, although the shopping center sector (–2.3%) was hindered by a 12% decline in Brixmor Property Group. The company's CEO, CFO and CAO were dismissed after an internal audit revealed accounting irregularities that had smoothed quarterly operating income. The shares rallied from a 20% decline after it was clarified that the manipulations did not affect formal accounting disclosures and that operating results at the company, including cash flow figures, were unaffected.

Canada (2.8%) had a gain and saw its currency appreciate as oil prices moved back above $30 per barrel. The plunge in oil over the past 18 months has weighed on the country's resources-dependent economy. Office landlord Dream REIT rose more than 20% as the company announced measures to lower its leverage, including selling lower-quality assets and cutting its dividend.

Europe Saw Elevated Volatility

In addition to global factors, political concerns in the U.K. and Spain contributed to market volatility in Europe. An "in or out" voter referendum for the U.K.'s so-called Brexit is now scheduled for June 23, with uncertain implications for trade and employment. In Spain, parties continued to strive to build a governing coalition post December's elections, with the possibility that socialist politicians could wield more influence.

European stocks also faced pressure mid-month from speculation that Deutsche Bank might miss payments on its contingent convertible bonds, a recently introduced form of regulatory capital. This spurred worries about the health of Europe's wider banking system, although those fears seemed excessive. The issue appeared to be an isolated case not reflective of Deutsche Bank's overall health, and Europe's banks in general saw improved performance late in the month from a credit perspective.

In terms of country performance, the U.K. (–6.4% total return) struggled. Macro factors again outweighed property fundamentals, which have remained strong as reflected in steady rental growth and low cap rates (high property values). Brexit concerns appeared to especially weigh on large London office companies, which typically had sizable declines in the month.

On the continent, Germany (1.3%) advanced and outperformed France (–3.0%) and the Netherlands (–1.6%), with the market's residential sector favored as a safe haven. In news, German apartment landlord Vonovia ended its unsolicited attempt to acquire rival Deutsche Wohnen, after shareholders of the latter rejected terms of the €14 billion ($15.7 billion) deal. Both stocks rose on the news.

Asia Pacific Outperformed

Hong Kong (0.5%) was relatively stable after a poor January, with REITs and developers both helped by receding concerns about U.S. interest-rate hikes. Among landlords, retail names such as Wharf Holdings rose on the potential for higher tourism due to a weakening U.S. dollar, while office names were weaker amid growth concerns. Developers that reported in the month were generally in line, with some positive dividend surprises.

Performance in Australia (3.0%) was lifted by strong returns from Goodman Group, which upgraded its earnings guidance. The company operates industrial properties in the U.S. and the U.K. as well as Australia. Vicinity Centers, an owner of malls in desirable coastal locations, also performed well, after beating earnings expectations; it has benefited from an improving Melbourne retail backdrop. Office companies tended to underperform.

In Singapore (4.1%), fourth-quarter GDP growth was revised upward to 1.8%, with better than expected services and construction growth. However, general macro indicators continued to point to softer GDP prints over the coming quarters. Good performers in the month included CapitaLand Mall Trust, a high-quality retail landlord, and certain office companies that had underperformed in 2015. Hospitality and industrial names generally underperformed.

Japan (–1.2%) underperformed in the region, with developers pressured by global growth concerns. However, Tokyo Tatemono outperformed on a positive earnings outlook stemming from profitable condo sales. J-REITs generally performed well as yields on Japanese bonds fell below zero for the first time, after the Bank of Japan imposed negative interest rates on excess bank reserves at the end of January. The low-rate environment increased the appeal of J-REITs' above-average income.
Investment Outlook

We maintain a favorable view of U.S. REITs based on improving demand growth, muted new supply, and valuations that in many cases are very compelling. We generally like U.S. property sectors that offer above-average growth supported by favorable demand and supply dynamics, including apartments, where an only modest recovery in for-sale housing and ongoing employment growth remain tailwinds.

Our positive outlook on self storage is based on the potential for continued market share gains by the public storage companies, with extremely limited new supply and steady demand growth. In the shopping center sector, we believe retailer expansion and occupancy growth should drive further improvement in pricing power. As we seek attractive opportunities in both economically sensitive and less-cyclical sectors, we continue to stress the importance of strong balance sheets and capable management teams.

Europe's Recovery Faces Challenges

We believe that some of the more specialized U.K. small- to mid-cap REITs continue to offer attractive upside potential, with room for the current expansion cycle to move forward. Tenant demand has been strengthening, while new supply remains tight in most property sectors, driving rents and property values higher. We also believe that lower energy costs and higher real wages should aid the consumer, resulting in better conditions for retail landlords, despite the internet challenge.

We are more cautious on London companies that have historically low property yields and high growth rates, as Brexit risk or a U.K. interest-rate hike could dampen future growth and thus reverse the yield compression cycle. In this environment, we like companies with attractive, operations-based business models with low leverage, including certain self storage, student housing and health care companies.

Looking to continental Europe, we believe the European Central Bank remains committed to quantitative easing, given the still-recovering European economy and the central bank's aim to protect the region from external shocks. We have a relatively favorable view of Europe's economic momentum compared with other major regions, as growth may be slower but less likely to decelerate.

We favor select companies in France and the Netherlands that offer attractive valuations, particularly in the high-quality shopping center space, that are likely to benefit from a recovery in retail spending. We like Germany's residential market given its stable rent growth, as well as its office market, but we are generally mindful of valuations and external growth strategies following strong absolute and relative performance over the past year. We also have opportunistic investments in Spain that we believe are well positioned to benefit from a rebound in rents and occupancy as the country's unemployment rate declines and demand recovers.

Slower Economic Growth but Attractive Valuations in Hong Kong

Property fundamentals in Hong Kong have been impacted by the weakening China economy and strong U.S. dollar. Overall retail sales growth in Hong Kong has been declining due to a slowdown in tourist spending. Having said that, we think the non-discretionary retail market, primarily catering to Hong Kong residents, should continue to deliver more steady growth. Meanwhile, office fundamentals in Hong Kong are still exhibiting positive rental trends, especially in the core Central business district, and a low supply backdrop should support operating fundamentals and capital values.

In Japan, the Tokyo office market is experiencing solid growth in occupancy rates to historically high levels. The internal growth prospects for some office J-REITs appear to be improving in our view, backed by rent increases. We remain positive on selective J-REITs that can deliver strong dividend yields or offer attractive valuations.

Australia's economy has stabilized in recent months at a below-trend but still consistent rate of growth. This has driven healthy retail spending at shopping centers in major cities, a trend that has been accelerated by the country's weak currency, which encourages residents to spend at home rather than abroad, including less online shopping through non-Australian retailers. After many quarters of poor operating results, Sydney's office market is beginning to exhibit net demand growth, which may begin to result in occupancy gains over coming quarters.

In Singapore, we prefer quality retail landlords that may be able to deliver resilient earnings in the lackluster economic environment. We remain cautious toward Singapore office REITs, as the pipeline of new supply is likely to pressure market rents over the next two years.

Jon Cheigh and Chip McKinley are global portfolio managers for Cohen & Steers' real estate securities portoflios.