Skip to main content
PGIM Real Estate LogoPGIM Real Estate Logo
    • Company Overview
    • Leadership
    • Locations
    • Contact Us
    • Careers
  • Overview
    • Real Estate Equity
    • Real Estate Debt
    • Public REIT Securities
    • Defined Contribution
    • Agriculture
    • Private Equity
    • Impact Investing
  • Overview
    • Stabilized
    • Transitional
    • Mezzanine
    • Agency
    • Agricultural
    • ESG Overview
    • Environmental
    • Social
    • Governance
  • Insights
  • News
  • Client Portals
Graph
Quarterly REIT Outlook

Global Real Estate Securities Commentary 3Q 2021GlobalRealEstateSecuritiesCommentary3Q2021

Oct 26, 2021

4 mins read

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Read more

Share

Global Market Review

Global REITs took a bit of a pause in the third quarter of 2021 as returns were essentially flat following strong gains in the first half of the year. We believe REITs continue to benefit from the 3 R’s: reopening, reflation and recalibration. And we expect these tailwinds to persist for the next few years.

US REITs were up slightly during the quarter and outperformed Europe’s and Asia’s listed real estate, which were down approximately 2% and 3%, respectively. Investors turned cautious on concerns over the COVID-19 Delta variant’s impact on global economic growth as well as concerns over the solvency and contagion of Evergrande, a large Chinese real estate developer with approximately $300 billion in debt. We have not had exposure to Chinese developers in any of our strategies. Toward the end of the quarter, signs that the COVID-19 Delta variant was peaking and decelerating in certain parts of the world renewed some investor optimism about growth prospects; however, some events that had been scheduled to be held in person in September and October got canceled or switched to virtual formats. Postquarter, Merck announced successful clinical trial results for a pill that significantly reduces symptoms and that can be taken within five days after incurrence of a COVID-19 infection. Merck’s is one of many pills in clinical trials that could hit the market by the end of the year and be game changers for COVID-19 treatment and could serve as forceful tailwinds for the reopening of property types like hotels and assisted-living facilities.

The 10-year Treasury yield in the United States dipped below 1.20% during the quarter but settled in a range of 1.25% to 1.50%, closing the quarter toward the high end of the range. Notably, in spite of the interest rate increase introduced at the beginning of the year, REITs in the United States were up significantly and outperformed the broad market because the combination of reopening opportunities in the space and property types with secular growth appealed to investors.

Active management continues to be an important component of the investor toolbox as opportunities shift from earnings streams that benefited from or were resilient to the pandemic to those that were only temporarily affected, but wherein long-term demand trends are intact. In 2021, REIT investors will have to effectively balance reflation opportunities (shorter-lease-duration companies) with earnings and reopening opportunities if they are to maximize alpha generation. We expect continued M&A activity as improved fundamentals and increasing valuations narrow the bid–ask of buyers and sellers and as $350 billion of capital targeting commercial real estate sits on the sidelines. During the quarter, two of our large overweight positions were acquired. MGM Growth Properties, a big landlord of casinos, particularly in Las Vegas, was acquired by its competitor VICI Properties for an approximately 17.5% premium to its prior day’s traded value. Columbia Property Trust, an owner of urban, gateway-city office buildings, was acquired by PIMCO at an approximately 15.5% premium to its prior day’s traded value.
The best performers during the quarter were apartments and specialty housing. The global shortage of midlevel and affordable housing is leading to pricing power for landlords. We remain overweight apartments and specialty housing and expect that trend to continue resulting in strong revenue gains.

The best performers during the quarter were apartments and specialty housing. The global shortage of midlevel and affordable housing is leading to pricing power for landlords. We remain overweight apartments and specialty housing and expect that trend to continue resulting in strong revenue gains.

The worst-performing sectors during the quarter were lodging and gaming. Lodging and gaming underperformed because of concerns over the pace of the corporate travel recovery based on the Delta variant and because of concerns over employee wage inflation. Geographically, the worst-performing region was Hong Kong as concerns over the common prosperity bill weighed on housing developers, as did concerns over Evergrande contagion, although the Hong Kong developers are pretty well insulated from any direct contagion effects. We are beginning to see a shift in earnings growth leaders in 2021 from companies that were least affected by the pandemic to those most affected.

Real estate trends that were in place prior to the COVID-19 pandemic are accelerating. Penetration by general e-commerce and grocery e-commerce, at the expense of brick-and-mortar real estate, is accelerating as new adapters are becoming forced to use e-commerce; and many of them will remain long-term participants. Mandated working 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 in Japan, which provided incentives for employers to have their employees work from home, and in Germany, where new legislation stipulates a legal right for some workers to work from home. Although such trends may be negatives for retail and office space, they are positives for last-mile industrial, cold storage, and data centers.
Because of very limited real estate supply additions and rapidly accelerating global economic growth, we expect a stock picker’s market, with some very attractive investment opportunities deriving from a disciplined, long-term, real-estate-fundamentals-based approach.

We are balancing our opportunities between companies whose fundamentals will benefit or be less affected in the current environment and value opportunities in property types that have been most negatively affected by the current environment. As a result, based on fundamentals and valuation, we are overweight global logistics and global affordable and midlevel-priced housing. We are overweight hotel companies globally, but particularly in Japan. We are also overweight multifamily and older-adult-housing companies. Geographically, we are overweight the United States based on a balanced opportunity set of secular growth names and reopening beneficiaries that have sold off recently. We are overweight Japan based on valuation and economic recovery prospects, though we continue to monitor new policy initiatives as a result of the election. We remain underweight retail and office globally as technology secularly disrupts those business models, but we have found some tactical opportunities in both office and retail because investors may be overly discounting working from home and retail tenant bankruptcies. In addition, we are underweight German residential based on concerns over rent regulation.

 

Read more

Author

  • Rick Romano
    Rick Romano

    Head of Global Real Estate Securities

Learn more
Public REIT Securities

Diversified portfolios of publicly traded real estate companies designed to meet a wide range of investor objectives

Learn more

  • About Us

    • Company Overview
    • Leadership
    • Locations
    • Contact
    • Careers
    • Client Portals
  • Investments

    • Overview
    • Real Estate Equity
    • Real Estate Debt
    • Public REIT Securities
    • Defined Contribution
    • Agriculture
    • Private Equity
    • Impact Investing
    • Senior Housing
    • Mexico Industrial
  • Financing Solutions

    • Overview
    • Stabilized
    • Transitional
    • Mezzanine
    • Agency
    • Agriculture
    • Loan Services
  • ESG

    • ESG Overview
    • Environmental
    • Social
    • Governance
  • Insights & News

    • Insights
    • News
PGIM Real Estate Logo
  • Terms & Conditions
  • PGIM Privacy Center
  • Accessibility Help
  • Cookie Preference Center

Disclosure Statement (California)opens in a new window     Disclosure Statement (Japan)       Disclosure Statement (UK)opens in a new window      Form CRS - PGIM, Inc.opens in a new window

For Professional Investors only. All investments involve risk, including the possible loss of capital.

The content and materials presented here are for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM, Inc., is the principal asset management business of PFI and is a registered investment advisor with the US Securities and Exchange Commission(SEC). Registration with the SEC does not imply a certain level of skill or training.  PGIM is a trading name of PGIM, Inc and its global subsidiaries.

In the United Kingdom, information is issued by PGIM Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number 193418).  In the European Economic Area (“EEA”), information is issued by PGIM Real Estate Luxembourg S.A. with registered office: 2, boulevard de la Foire, L-1528 Luxembourg. PGIM Real Estate Luxembourg S.A. is authorised and regulated by the Commission de Surveillance du Secteur Financier (the “CSSF”) in Luxembourg (registration number A00001218) and operating on the basis of a European passport. In certain EEA countries, information is, where permitted, presented by PGIM Limited in reliance of provisions, exemptions or licenses available to PGIM Limited under temporary permission arrangements following the exit of the United Kingdom from the European Union. These materials are issued by PGIM Limited and/or PGIM Real Estate Luxembourg S.A. to persons who are professional clients as defined under the rules of the FCA and/or to persons who are professional clients as defined in the relevant local implementation of Directive 2014/65/EU (MiFID II). In Germany, this material is distributed by PGIM Real Estate Germany AG, a regulated entity by the Bundesanstalt für Finanzdienstleistungen (BaFin).

In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ("PGIM Japan"), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 (paragraph (a) to (i) of the Securities and Futures Ordinance (Cap.571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.

In Australia, information is issued by PGIM (Australia) Pty Ltd (“PGIM Australia”) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). PGIM Australia is a representative of PGIM Limited, which is exempt from the requirement to hold an Australian Financial Services License under the Australian Corporations Act 2001 in respect of financial services. PGIM Limited is exempt by virtue of its regulation by the Financial Conduct Authority under the laws of the United Kingdom and the application of ASIC Class Order 03/1099. The laws of the United Kingdom differ from Australian laws.

Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.

©2022 PFI and its related entities.

Links

Links from this website to a non-PGIM website may be provided for the user’s convenience only. PGIM does not control or review these third-party sites nor does the provision of a link imply any endorsement of our association with such non-PGIM sites. Your linking to any websites from this website is at your own risk. To the extent that any information on this website relates to a third party, this information has been provided by that third party and is the sole responsibility of such third party and, as such, PGIM accepts no liability for such information. Subject to the terms of applicable service or other agreements, we will remove any link from this website upon request from the owner of the linked website. 

Links from this website to affiliates are provided for the user’s convenience only. Each affiliate’s website is issued or approved solely by the applicable affiliate and unless stated otherwise on such affiliate’s website, is not issued by PGIM, Ltd. or any other non-U.S. entity. Each affiliate is solely responsible for the content of its respective website. The laws governing any affiliate and its respective websites may differ from the laws governing pgim.com and the relevant website's terms and conditions and policies may differ from those of pgim.com. 

©2022 Prudential Financial, Inc. and its related entities.