PGIM Fixed Income 2021 ESG Annual Report
PGIM Fixed Income's 2021 ESG Annual Report explores our framework aimed at ensuring clients understand their ESG approach.
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.
After strong performance in July and August as a result of solid corporate earnings reports and the reopening of European economies after lockdown, the European public real estate market gave up those gains in a weak September. The European REIT index saw a steep negative return of minus 10.2% (U.S. dollar gross total return) in September, making it the weakest of the three global regions for the month. For the third quarter as a whole, Europe finished in second place, with a total return of minus 2.2%, behind North America but ahead of Asia Pacific. The U.S. dollar climbed against all of the major European currencies (the pound, the euro and the Swedish krona) in the third quarter, depressing returns across the region.
September’s share price falls were triggered by a combination of bond yield spikes on renewed inflation fears and concerns that supply chain interruptions could delay economic recovery in parts of the region. From a sector perspective, the industrial and self-storage sectors maintained their strong earnings and share price momentum. Retail continued to struggle in the quarter after experiencing a brief reopening boost. Office performance was more mixed in the quarter, with the UK doing better than other countries as employees began returning to offices there, as vaccination rates climbed and as the economy reopened.
The region was in risk-off mode during the quarter, which stemmed from (1) low vaccination rates, with the exception of Singapore; (2) expansion of geographic lockdown and duration of lockdown in Japan and Australia; and
(3) regulatory tightening in China, which lowered the medium-term growth rate of companies in China and Hong Kong.
Among subsectors, Hong Kong developers (minus 14.1%5 in U.S. dollar terms) were the main drags because sentiment was dampened by news of debt-laden Chinese developer Evergrande’s possible collapse and worries about the implementation of a common prosperity policy in Hong Kong. On the other hand, Japanese and Singaporean developers rose 2.1% and 0.4%, respectively. For REITs, Japan’s REITs fell the most (minus 5.0%), followed by Singapore’s (minus 2.5%) and Australia’s (minus 0.9%). It is of note that depreciation of the Australian dollar against the U.S. dollar more than wiped out gains in local Australian dollar terms for the quarter.
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Past performance is no guarantee of future results. The views expressed herein are those of PGIM Real Estate investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. This commentary does not purport to provide any legal, tax, or accounting advice. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice.
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