For investors in listed real estate who are deeply concerned about growth slowdowns and increased financing costs, 2022 is a year that will not soon be forgotten. For this week’s Top-5, we look at the best-performing global real estate funds in 2022.
Rising interest rates are generally not good for interest rate-sensitive industries, including technology and real estate. Both were able to benefit from historically low financing costs for a long time until that really came to an end during 2022. Moreover, the real estate sector is also dependent on overall economic growth which is currently subject to a lot of uncertainty. Real estate funds in Europe (-33.5 percent), North America (-23.8 percent) and, to a lesser extent, Asia (-9.4 percent) consequently suffered sharp losses. The FTSE EPRA Nareit Developed index, a widely used measure of the performance of listed property companies and REITS worldwide, lost as much as 20.2 percent measured in euros or 7.4 percentage points more than the MSCI World index.
In doing so, it seems the market has already priced in a recession and can look ahead. Investors know that REITS, companies that own, operate or finance income-generating properties traditionally perform well when the rate hike cycle is over, and the index at the end of January, meanwhile, some 7 percent above its low just before Christmas, and that while operating margins are are falling. The risk, however, is that the Fed may choose to continue with longer rate hikes than the market currently expects. Should that happen, the end of the cycle is further away, which would be very negative for the sector.
The impact of inflation
The impact of inflation and rising interest rates on listed real estate is ambiguous. On the one hand, some leases are indexed for inflation. For agreements, in principle, rents can be increased in the short term. On the other hand, higher labour wages, energy and increased material prices contribute to higher costs for developers. Those in turn reduce potential profits for new construction. Ultimately, the debt ratio and maturity will also vary greatly from company to company, with companies that need to enter the market now doing so on much less favourable terms. Active managers will try to capitalise on this.
Frederic Tempel, lead manager of the AXA WF Global Real Estate Securities fund, which has been awarded a Bronze rating by Morningstar analysts a Bronze rating, is currently overweight subsectors with high pricing power such as logistics and healthcare as well as those with short-term leases such as student accommodation and US residential real estate. It remains underweight in offices and retail.
Listed versus private real estate
A notable phenomenon was the dramatic performance difference between listed and private real estate in 2022. While the FTSE Nareit Developed index had to lose almost 19 percent over the first nine months of last year, according to Cohen and Steers, the NCREIF ODCE index, a measure of private real estate calculated quarterly over the same period, rose by 13 percent higher in dollar terms. The latter typically lags behind listed real estate because of its lower liquidity, according to the asset manager.
Top-5
For this week’s Top-5, we look at the best-performing global real estate funds in 2022 whose distribution fee-free fund class is available in the Netherlands.
In first place is Invesco Global Income Real Estate Securities, which suffered a 15.6 percent loss last year. It did finish in the third percentile of its property - indirect global Morningstar category and outperformed the passive alternatives. The iShares Developed Real Estate Index which is rated Gold by Morningstar analysts, lost 19.8 percent in the past calendar year. Invesco’s fund alternated strong with weak years over the past five years. It has been managed by James Cowen, Darin Turner and Charles McKinley since June 2018, May 2021 and May 2022, respectively. Previously, Joe Rodrigguez (2008-2022) and Paul Curbo (2008-2021) were at the helm. The objective of this fund is to generate income and to a lesser extent long-term capital growth by investing in a diversified securities portfolio of companies but also other entities active in the global real estate sector. Thus, the portfolio is spread across residential, office and industrial real estate, but also includes data centres, storage and so on. However, in the top 10 positions we also find CMOs, a type of MBS containing a collection of mortgages that are sold bundled (according to maturity and risk level). CMOs receive cash flows when borrowers repay their mortgages that serve as collateral for these securities. CMOs distribute principal and interest payments to their investors. Although this is a global property fund, the weighting to the US is about 80%.
Kempen Global Property Fund is also in the top five. This fund is managed on the basis of bottom-up stock selection where Kempen’s real estate team looks for undervalued listed real estate companies. This takes into account the quality of the underlying assets, the financial balance sheet and the quality of the management team. Using data analysis technology, the Real Estate Team collects relevant data points for 200,000 real estate properties worldwide, which are converted into information that can help with investment decisions. Environmental, social and governance (ESG) criteria are also an integral part of the investment process. At the end of December 2022, the portfolio’s exposures included industrial property (38.4%), offices (19.6%), residential (14.4%) and retail (12.8%). The largest exposures were in Equinix (5.8% - data centres), Prologis (4.1% - logistics), and Alexandria Real Estate (3.8% - life science real estate). The experienced management team consists of Jorrit Arissen, Egbert Nijmeijer, Lucas Vuurmans, Robert Stenger, Mihail Tonchev, Andreas Welter and Alex Williamson.
Top 5 global real estate funds in 2022:
Thomas DeFauw is manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.
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