Global Market Review
Positive vaccine news and clarity on the U.S. Presidential election results drove performance in global REITs for the fourth quarter. Pfizer released news of their COVID-19 phase 3 clinical trials and surprised investors with a highly effective 90% efficacy rate. Moderna announced similar vaccine results shortly thereafter. Additionally, the hotly contested U.S. Presidential election ultimately produced a clear winner after several days of ballot counting.
Regional REIT performance was driven by how far along each region was in its COVID-19 recovery curve, pre-vaccine announcement, with Europe and the U.S. outperforming Asia on the positive vaccine news. Global REITs were up over 13% during the quarter. A clear economic re-opening signal was a significant catalyst for REIT outperformance since the pandemic hit right at the heart of real estate and impacted how people live, work, and play. Investor concerns remain regarding the magnitude of the “COVID-19 Winter” virus outbreak and new mutations that may spread more easily and/or be more resilient to existing vaccines; however, continued government stimulus and vaccine roll outs have investors optimistic that COVID-19 winter impacts will be temporary. 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 earnings streams that were temporarily impacted by the pandemic, but long-term demand trends are intact. Additionally, in the U.S., the post quarter Georgia senate election runoff gave democrats control of congress and sets the U.S. 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, retail and healthcare companies. These companies will benefit most from a successful vaccine rollout and re-opening. The worst performing sectors during the quarter were data centers and industrial, reversing some of the massive out-performance these companies generated during the pandemic. We would expect a shift in earnings growth leaders in 2021 from companies that were least impacted by the pandemic to those most impacted, especially during 2Q 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 e-commerce, and many will remain as 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.
Low interest rates, massive and quick government stimulus and virtually no new supply will set REITs up to perform relatively well in the recovery. As a result, 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 cold storage, global affordable and mid-level priced housing, based on fundamentals and valuation. We are also overweight gaming REITs based on valuation and credit quality of both the tenant and the REIT. We are also finding opportunities in healthcare, hotel and restaurant based net lease. Geographically, we are overweight Hong Kong and Germany based on relative valuation. We remain underweight retail and office globally as technology secularly disrupts those business models. We continue to monitor movement of tenants and residents out of densely populated urban areas to suburbs and rural areas. Many employees and residents remain uncomfortable with dense mass transit commuting options. While we believe this will clearly be a short to mid-term trend as result of COVID-19, it is too early to tell if this will turn into a long-term trend as well.