The official blog of BNP Paribas Asset Management

Real estate recovery – Natty or juice?

The use of stimulants has been a constant in professional top sport and especially cycling. Sportsmen and women at the highest level often hear the question, “Natty or juice?” after an outstanding performance. It asks whether the achievement reflects natural talent and hard work or whether it has been helped along by lab-grown stimulus.

As in sport, so it is in financial markets, and by extension in listed real estate investing. Is the recent market recovery the product of improving fundamental factors or was it induced by a sizeable fiscal and monetary shot in the arm to address the fallout from the COVID-19 pandemic?

Suspicion hangs over the rally in the capital markets since March. This saw global real estate investment trusts (REITs) rise by 30% in euro terms from the low.[i] Is there a whiff of steroids around the impressive comeback in some REIT sectors?

The COVID comeback

There’s little dispute about what triggered the February rout in REIT and equity markets. That selloff saw global listed real estate return fall by 42% in the month after 21 February as capital markets realised that the COVID-19 outbreak was going global and would hit economies and company earnings. Hotels, retail and healthcare were the most severely impacted segments.

This was before central bank stimulus and fiscal spending across the world appeared began to put a floor under equity markets. The recovery was largely sustained until early June when concerns about a possible second wave in parts of the US materialised. Markets such as Canada, Norway and Sweden led the recovery, while in the US, hotels and retail were at the forefront of the bounce-back (see exhibit 1a and b).

Exhibit 1a:

Exhibit 1b:

Was it just stimulus?

So are there any fundamental reasons for the recovery? Clearly, part of the backdrop to this rally has been a powerful liquidity boost. Global stimulus estimated at a chunky 26.5% of global GDP[ii] caused the market to pause its selloff and raised investor expectations of a solid recovery in H2 2020, led by the US Federal Reserve pledging USD 6.2 trillion in liquidity, or the equivalent of 29% of US GDP.

The trillions in central bank and government stimulus and pledges of more help gave confidence to investors and provided the economy with liquidity that has pumped the equity rally.

Exhibit 2a:

Exhibit 2b:

The exceptional stimulus of the last three months is similar to the playbook adopted by the Fed in 2009-2011 (exhibit 2) and supported US REITs. Their rally continued well beyond the Fed’s efforts to grow its balance sheet, driven by improving economic fundamentals. Occupancy and rental growth started to recover across direct market sectors, in line with a broader improvement in the US economy.

Fundamentals or pharma?

At a recent virtual listed real estate conference hosted by NAREIT, the trade body for US REITs, companies confirmed that fundamental changes were slowly beginning to influence their businesses positively. Equally, companies in Europe and Asia have reported improved conditions.

Even the hardest-hit sectors such as hotels and enclosed shopping malls were opening their doors again to paying customers in May and June, with people returning to shop for clothes and book short stays at drive-to vacation destinations.

The relaxation of lockdown restrictions in destinations such as Italy and Spain, as well as US cities such as New York and California, is being increasingly acknowledged on the ground by REITs.

Tour de force?

Normally, the Tour de France would dominate our attention in July, and the race – the most exciting event on the annual cycling calendar – would not be complete without speculation about whether the leader was a natural, i.e. a very talented athlete, or a winner spurred on by concoctions of their team’s scientists.

Clearly, when it comes to the market, the recovery involved stimulus – trillions of dollars of it. However, like the aftermath of the GFC, it would not have begun without any signs that the fundamentals that drive the earnings of REITs, and equities generally, were improving.

As for COVID-19, it is clear that the strength of the recovery from the disease will be determined in pharmaceutical laboratories in the US, Europe or China and not just by the stimulus measures of the monetary ‘alchemists’ in Frankfurt and Washington.

Written 15 June 2020

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

[i] Source: Bloomberg, 15 June 2020

[ii] Source: Cornerstone Macro, 12 June 2020

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