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.