Global Market Review
The global REIT market benefitted from the re-opening and economic recovery theme of the first quarter. In the United States, REITs outperformed the broader equity markets by approximately 300 bps; however, in Europe where there is more concern about the vaccination roll out, general equity markets outperformed REITs. Global geographic regions that have made the most progress in the vaccination implementation outperformed those regions that were slower to roll out vaccinations. As a result, U.S. REITs outperformed both Europe and Asia REITs. The quarter, however, was not without volatility as investor concerns around the run up in value stocks, combined with new lockdowns in Europe and the United States and new virus variants that may be more resistant to current vaccines, weighed on investor sentiment about the timing of the re-opening. .
As a result of additional fiscal stimulus in the United States, and heightened enthusiasm around economic growth, the U.S. 10-year Treasury yield increased from 0.91% to 1.74%. Notably, in spite of the interest rate increase, U.S. REITs were up significantly and outperformed the broad market as the combination of re-opening opportunities in the space and property types with secular growth appealed to investors.
Active management continues to be an important tool in the investor toolbox as opportunities shift from earnings streams that benefitted or were resilient to the pandemic to those that were temporarily impacted by the pandemic, but with long-term demand trends that remained intact. Additionally, in the United States, the post-quarter Georgia senate election runoff gave democrats control of congress and set the country up for a period of reflation as government stimulus and spending is expected to increase. In 2021, REIT investors will need to effectively balance reflation opportunities (shorter lease duration companies), with earnings opportunities and re-opening opportunities to maximize alpha generation.
The best performers during the quarter were hotel and retail companies which are set to benefit most from a successful vaccine rollout and re-opening. The worst performing sectors during the quarter were data centers and net lease. Data centers reversed some of the massive out-performance these companies generated during the pandemic and net lease companies’ long lease durations concerned investors in a rising rate environment. We continue to expect a shift in earnings growth leaders in 2021 from companies that were least impacted by the pandemic to those most impacted, especially during second quarter 2021 year-over-year earnings comparisons.
Real estate trends that were in place prior to COVID-19 are accelerating. The penetration of e-commerce and grocery e-commerce, at the expense of bricks and mortar real estate, is accelerating as new adapters are forced to use shop online, and many will remain long-term e-commerce participants. Mandated work from home in most parts of the developed world will lead to less demand for office real estate globally as firms realize portions of their business can work remotely without a loss in productivity. We have seen announcements from governments, like Japan, providing incentives to employers to have their work force work from home and new legislation introduced in Germany which would provide a legal right for some workers to work from home. While these trends may be a negative for retail and office space, they are a positive for last-mile industrial, cold storage, and data centers.
Due to very limited real estate supply additions and rapidly accelerating global economic growth, we expect a stock pickers market with some very attractive investment opportunities deriving from a disciplined long-term real estate fundamentals-based approach.
We are balancing our opportunities between those companies whose fundamentals will benefit or be less impacted in the current environment with value opportunities in property types that have been most negatively impacted by the current environment. As a result, we are overweight global logistics and global affordable and mid-level priced housing, based on fundamentals and valuation. We are overweight hotel companies globally, particularly in Japan and the U.S. multifamily companies and senior housing companies. Geographically, we are overweight the United Kingdom based on relative valuation, though we recently found tactical opportunities in continental Europe office and retail companies. We are overweight Hong Kong developers based on valuation and an economic recovery as China eventually re-opens its borders with Hong Kong. We remain underweight retail and office globally as technology secularly disrupts those business models, however we have found some tactical opportunities in both office and retail as investors may be overly discounting work from home and retail tenant bankruptcies.