Global Real Estate Opportunities - Looking Beyond the Lockdown

Despite the volatilty and uncertainty surrounding the COVID-19 lockdown, PGIM Real Estate is capitalizing on global shifts within property types and finding potential opportunities in the public real estate market.

Real Estate Investment Trusts (REITs) sold off by more than 28%1 during the first quarter of 2020, a drop that was similar in magnitude and speed to that of the global financial crisis but was more pronounced because of the closure of social gathering-oriented real estate in most parts of the world. However, we believe there remains a strong opportunity in the REIT mar¬ket for active managers, as volatility and dispersion have created alpha opportunities. With the heightened level of uncertainty in the market, PGIM Real Estate’s information advantage, with real-time boots-on-the-ground information coming in from its private real estate asset management teams, is invaluable in determining the most likely impact on property values and on REIT NAVs.

 

What property types have been hit hardest?

 

  • Retail: The sector is facing severe challenges. PGIM Real Estate believes bankruptcies will accelerate and the number of companies not paying rent will continue to be significant. The team is focusing on company balance sheets to assess who can withstand this and for how long. They remain significantly underweight the retail sector in the PGIM Global Real Estate Securities Fund.
  • Hotels: The team has a cautious outlook on hotels and an underweight position. They were underweight hotels coming into the lockdown.

 

What property types might see fundamental outlook changes from the pandemic?

 

  • Offices: The mandated work-from-home policies (WFH) in most parts of the developed world could lead to less demand for office space globally. It is difficult to say what the magnitude will be, but the team believes there will be some level of continued WFH that will affect demand for offices. As a result, PGIM Real Estate is underweight offices, and underweight NYC office REITs in particular, as public transportation is an extra hurdle for urban offices. While there are potential positives such as more space needed within offices for social distancing, these trends are a net negative overall for offices.
  • Health Care: Occupancy in Senior Housing and Nursing Home-focused REITs has been hit hard and prospects are bleak. While the team is underweight these REITs, it is overweight Medical Offices and Hospital REITs. PGIM Real Estate sees good long-term stability here after elective procedures pick up.

 

Where does the team see opportunities for growth?

 

  • Industrial: The sector is benefiting from continued growth in e-commerce at the expense of brick-and-mortar retail. New adapters are being forced to use e-commerce for both hard goods and groceries. This benefits industrial REITs focused on last-mile delivery and logistics. The team remains overweight these REITs, which have been a major active position over the last few years. In particular, grocery e-commerce is growing strongly and PGIM Real Estate believes it could potentially grow its market share over time. The team is overweight REITs with cold storage warehouses that facilitate grocery delivery. Supply chain issues have online retailers seeing unprecedented shortages of their own goods, which will encourage them to keep more inventory closer to customers. This will create more demand for warehouse space.
  • Data center REITs and Cell tower REITs: Where demand for office space falls, cell towers and data centers can benefit. As the demand for cloud-based services and 5G accelerates in a WFH environment, PGIM Real Estate believes these REITs should grow. The team is overweight these sectors.
  • Residential: PGIM Real Estate’s view is that this sector is oversold and presents a good value opportunity. Occupancy is fine and rents have been helped with stimulus packages which provide rent relief. April and May rents were better than expected for apartments. The team likes mid-level-priced housing and manufactured housing, which has been a theme for a while. The team anticipates a decent bounce-back in net operating income, assuming we do not have a prolonged recession.
  • These growth ideas are balanced with value opportunities. The team has seen some bargains in Student Housing REITs, Gaming REITs, and restaurant-based Net Lease REITs that were priced for the worst-case scenario, and the team has increased these holdings.

 

A Breakdown Across Regions

 

Regional return dispersion in the first quarter of 2020 was driven primarily by how far along each region was in its COVID-19 curve, as the Asian REITs market outperformed the European and U.S. REITs markets.

  • United States: The U.S. REITs market was down approximately 27.3%2 at the end of the first quarter and underperformed the S&P 500 (-19.6%) by approximately 770 basis points, which was driven by the country’s essential shutdown of hotels, malls, and casinos. In line with the global trend, COVID-19 has magnified several of the pre-existing themes in the U.S. real estate market. PGIM Real Estate has increased its underweight to retail and hotels, while increasing its overweight to the industrial and traditional and non-traditional multifamily sectors.
  • Europe: Overall, the European REITs market is trading at a discount to NAV. Across the continent, the German, Dutch, and French office markets are demonstrating strong relative value and appropriate market rents relative to the current supply and vacancy outlook. Paris remains a low va¬cancy market with a low supply of high-quality office space, which we believe will support the market during the downturn and create an opportunity for a strong rebound as the economy recovers. The greatest shift in investor preference has been in the German residential market, where regulation risks that challenged the sector in 2019 have taken a backseat to the relative safety in cash flows during the COVID-19 outbreak.
  • Asia Pacific: Across Asia Pacific, there has been significant underperfor¬mance in retail and hospitality REITs, where rent holidays have been announced by governments in Singapore, Japan, and Australia leading to uncertainty around cash flows for landlords. In Hong Kong, where PGIM Real Estate has an overweight position, residential development REITs were already trading at trough valuations prior to COVID-19. The earlier lockdown measures in Hong Kong have also led to limited downside to share prices and the scarcity of res¬idential land in Hong Kong will support valuations moving forward. In Australia, PGIM Real Estate’s securities business remains overweight in logistics and has taken a value position in the residential space in anticipation of an economic rebound as the country’s economy reopens. In Japan, there is value within the prime office and residential development REITs, and logistics REITs are expected to continue to show the best growth of any real estate sector.

Source: Bloomberg, PGIM Real Estate. 1Represents the FSTE EPRA/NAREIT Developed Index as of 31 March 2020. 2Represents the FTSE NAREIT Equity REITs Index as of 31 March 2020.


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

Definitions: Alpha is a measure of a fund’s risk-adjusted return. Alpha can be used to directly measure the value added or subtracted by a fund’s manager. It is calculated by measuring the difference between a fund’s actual returns and its expected performance given its level of market risk as measured by beta.

 

PGIM Global Real Estate Securities Fund USD I Acc

PERFORMANCE (%) AS OF 31 MAY 2020

Net Returns

3-month  

 YTD

1-year

3-Year

ANNUALISED Since Inception (10 December 2015)

Fund USD I Acc

-11.88

-16.77

-10.01

1.25

1.96

Benchmark

-17.11

-23.31

-17.08

-2.19

-

Difference

5.23

6.54

7.07

3.44

-

ROLLING 12-MONTH PERFORMANCE (%) TO YEAR ENDED 31 MAY 2020

Net Returns

2016

2017

2018

2019

2020

Fund USD I ACC

-

1.24

5.00

9.84

-10.01

Benchmark

-

3.06

4.93

7.53

-17.08

Source: PGIM, Inc. as of 30 April 2020.

 

 

Past performance is no guarantee of future results.

Fund performance is presented in its base currency, USD. The performance of different share classes is expected to differ. Net returns are calculated on a Net Asset Value (NAV) to NAV basis and reflect the deduction of ongoing fees, which includes the management fee. Benchmark is FTSE EPRA/NAREIT Developed Index (USD). Please see Important Information for disclosures and benchmark descriptions. Fund performance is as of the last Business Day of the month as defined in the Fund Supplement which may differ from the month end.  


Risks
An investment in the Fund involves a high degree of risk, including the risk that the entire amount invested may be lost. The Fund is primarily designed to purchase certain investments, which will introduce significant risk to the Fund, including asset performance, price volatility, administrative risk, and counterparty risk. No guarantee or representation is made that any Fund’s investment program will be successful, or that such Fund’s returns will exhibit low correlation with an investor’s traditional securities portfolio.
The Fund may be deemed to be a speculative investment and is not intended as a complete investment program. Investment in the Fund is suitable only for persons who can bear the economic risk of the loss of their investment and who meet the conditions set forth in the Fund Documents. There can be no assurances that the Fund will achieve its investment objective. Prospective and existing Shareholders should carefully consider the risks involved in an investment in the Fund, including, but not limited to, those discussed in the Fund Documents. Prospective and existing Shareholders should consult their own legal, tax, and financial advisors about the risks of an investment in the Fund. Any such risk could have a material adverse effect on the Fund and its Shareholders.

The return may increase or decrease as a result of currency fluctuations. The use of financial derivative instruments may result in increased gains or losses within the Fund. Where an investor's own currency is different from the currency of the Fund, the return on investment may be affected by fluctuations in the currency exchange rate. The NAV of the Fund is calculated on a daily basis and published on the Fund's website at the following address: pgimfunds.com.

Currency Risk: The value of the investments of the Fund designated in another currency may rise and fall due to exchange rate fluctuations.

Custodial Risk: Assets which are traded in markets where custodial and/or settlement systems are not fully developed, may be exposed to risk in circumstances where the custodian will have no liability.

Emerging Market Risk: The Fund invests in emerging markets, which may experience political, market, social, regulatory, and/or economic instabilities. These instabilities may reduce the value of the Fund's investments.

Market Risk: Investments are subject to normal market fluctuations and the risks inherent in investment in international securities markets.

Political Risk: The value of the Fund’s investments may be affected by uncertainties such as international policy developments and changes in government policies.

Value Style Risk: There are risks associated with value style investing including that the market may not recognize a security’s intrinsic value for a long period of time or a stock judged to be undervalued may not be undervalued, the value style may be out of favour for a period of time and so the Fund may underperform the market in general, its benchmark and other funds.  


Index Description
The Benchmark is unmanaged and reflects the stock performance of companies engaged in specific aspects of the major real estate markets/regions of the world. Source: FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. "FT-SE®", "FOOTSIE®" and "FTSE4GOOD®" are trade marks of the London Stock Exchange Group companies. "NAREIT®" is a trade mark of the National Association of Real Estate Investment Trusts ("NAREIT”) and "EPRA®" is a trade mark of the European Public Real Estate Association ("EPRA”) and all are used by FTSE International Limited ("FTSE”) under licence. The FTSE [name of index] is calculated by FTSE. Neither FTSE, Euronext N. V., NAREIT nor EPRA sponsor, endorse or promote this product and are not in any way connected to it and do not accept any liability. All intellectual property rights in the index values and constituent list vests in FTSE, Euronext N. V., NAREIT and EPRA. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
The Investment Manager (as defined below) may alter the benchmark of the Fund from time to time to any other benchmark which the Investment Manager determines, in its sole discretion, is generally representative of the Fund’s appropriate market. Shareholders will be notified in advance of any change in the benchmark of the Fund.
The financial index referenced herein as the benchmark is provided for informational purposes only. The use of benchmarks has limitations because portfolio holdings and characteristics of the Fund will differ from those of the benchmark, and such differences may be material. All indices and averages are unmanaged. You cannot make an investment directly in an index or average.


Notice
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This article represents the views, opinions, and recommendations of the authors as of 30/4/2020 regarding the economic conditions, asset classes, securities, issuers, or financial instruments referenced herein. It is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this article.
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1037336-00001-00   Expiration:  8/31/2020