February ended with Russia’s full assault on Ukraine which poses significant risks to a global economy already suffering from soaring inflation and the ongoing pandemic.
Sanctions by the West have triggered a financial crisis in Russia that is likely to deepen the country’s economic downturn. The two main channels for a broader global impact are higher inflation and tighter financial conditions. Although the Fed will raise interest rates in March, lower rate hikes than previously expected are being discussed for the future, as the impact of the war on the global economy is not yet clear. As a result, all regions showed a negative performance in February. The Eurostoxx 50 lost -5.89 per cent, followed by the S&P 500 with -2.88 per cent and finally the Nikkei Index, which fell by -1.57 per cent.
REIT markets outperformed the broader equity markets. The EPRA Global REIT Index lost only -2.38 per cent last month. Asia ended the month with a small gain of +0.30 per cent. The other two main regions, Europe and North America, performed slightly worse. At -2.59 percent, the performance of European REITs was 50 percent better than that of the broad equity market, while North America closed at -3.01 percent, similar to the broad equity market (all figures in EUR). The UK REIT index lagged the European REIT index by around 0.2 per cent last month.
“Our model portfolio closed February with a plus of +0.70 percent. This brings its performance for the year to -3.33 per cent, which is significantly better than the performance of the global REIT index at around -8%. In addition, it was able to achieve a dividend yield of +0.81 per cent (gross without withholding tax) for the first two months of 2022,” announced DeA Capital Real Estate.
In February only two sectors on a global base showed positive performance: Lodging/resorts and offices. The main reason for this positive development is that market participants find these sectors undervalued meanwhile. The valuation gap to other sectors is big and prices paid in private deals are too high and offer good opportunities in the listed space to invest.
Healthcare was least preferred as they are in the short term a proxy to fixed income and therefore suffered from rising interest rates. Industrial again came under pressure as possible growth impacts due to the above-mentioned conflicts became more severe.
For retail REITs’ first incoming results for the year 2021 provide some evidence of recovery from Covid-19, switching the focus from crisis management to rebuilding. But earnings and portfolio values are still significantly below 2019 levels. Growth from this base may be achieved if mall REITs embrace online and environmental issues.
As uncertainties about inflation and the outcome of the war between Russia and Ukraine prevail for the moment, it’s too early to predict how these topics will impact the economic development during the next few weeks and months. Actual financial health of the REITs, indexation of rents and already published results make us confident that our forecast of a dividend yield of 4.0 to 5.0 percent will be reached. Depending on the length of the war between Ukraine and Russia and its possible implications on the economy our total return forecast of 11 to 14 percent for 2022 could be under scrutiny.
Source: DeA Capital Real Estate
