Our fund benchmark, the FTSE EPRA/NAREIT Developed Net Rental Index, recorded a net total USD return of 2.48% in September. The best performing listed real estate market was the UK, which recorded a total USD return of 8.32% for the month. Australia recorded the lowest total USD return of -3.17%.

Year to date, our fund benchmark has recorded a net total USD return of 21.20%. The best performing listed real estate market for the nine months was the US, with a net total USD return of 25.55%. Hong Kong recorded the lowest total USD return of 3.44% for the nine months.

Global debt and equity market returns have been strong so far this year. The MSCI World Index is up just over 18% and the 10-year US Treasury note has decreased by 100bps. Investment grade corporate bonds, as measured by the Moody’s BAA Index, are trading below 3.9%, the lowest yield ever. Most of the government debt in Europe, as well as in Japan, is trading at negative yields. This low-yielding environment has been a tailwind for real estate returns, as demand for assets that deliver positive cash flow with growth prospects has been high.

However, it goes without saying, that not all listed real estate has performed equally well. There is a wide range in the best and the worst company returns this year. Some of the highest returns for companies on our radar are (all returns are in USD): Equinix 66% (Data Centres), Rexford 52% (Industrial), and Invitation Homes 50% (Single Family Homes). The stocks that have delivered the lowest returns are all retail names, with Intu (UK) delivering -62%, CBL & Associates (US) -30%, and Wereldhave (Continental Europe) -23% year to date.
The wide range of returns reflects how drastically different the fundamentals and outlook can be for various real estate sectors. In our August report we wrote extensively about Data Centres and Towers, which continue to experience secular tailwinds from the ever-increasing consumption, storage and transmission of data to and from smart devices. However, attractive development profit margins have led to increased supply in some data centre markets, notably in Northern Virginia – the largest and most important data centre market. CBRE estimates that around 55% of new data centre developments in Northern Virginia is pre-leased. Leasing transactions can be lumpy in the data centre business. Due to strong demand, expectations are for the remaining available space to be leased without causing significant disruptions in market rents.

Overall, real estate fundamentals remain healthy, mainly due to manageable supply levels relative to demand. The estimated forward FAD (Funds Available for Distribution) yield for the sector is 4.46%, and medium-term growth prospects are decent. Listed real estate has performed well this year and, on the whole, appears to be fairly priced given our USD real return requirement of approximately 4.8% and current global bond yields. Within the real estate universe, more attractively priced opportunities exist in specific real estate sectors and stocks.