SUGI CAPITAL MANAGEMENT - Global Real Estate Securities Market First Quarter 2019 Market Review
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SUGI CAPITAL MANAGEMENT Global Real Estate Securities Market First Quarter 2019 Market Review April 9, 2019
DISCLAIMERS
The information contained in this presentation is strictly confidential and intended solely for use of the persons to whom it has been delivered. It is not
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This presentation contains information which is based on, or derived from, information provided by independent third-party sources. Sugi Capital
Management, Inc. (“Sugi Capital”) believes that such information is accurate and that the sources from which it has been obtained are reliable.
However, neither Sugi Capital nor any related companies or principals guarantee the accuracy, timeliness or consequential losses arising from its use. All
such information contained herein is for information purposes only and does not constitute an offer to sell or a solicitation to buy any securities and is
subject to change without prior notice. Readers should not assume that their performance will equal or exceed historical results and/or averages.
Past performance is not indicative of future performance. Except as required by applicable law, Sugi Capital is under no obligation to update this
presentation or the information herein, other than its obligation to provide quarterly portfolio performance reports to its investors.
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Sugi Capital Management, Inc. 1
A GOOD QUARTER FOR MOST ASSET CLASSES
1Q19 PERFORMANCE – EQUITIES, BONDS, REITS, AND COMMODITIES
18.00% After a dismal fourth quarter of
Commodities 2018, global REITs roared back in
16.00% Global REITs the first quarter of 2019
14.00% Global Equity
Global Bonds
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2/12/2019
1/15/2019
1/22/2019
1/29/2019
2/19/2019
2/26/2019
3/12/2019
3/19/2019
3/26/2019
1/1/2019
1/8/2019
2/5/2019
3/5/2019
-2.00%
-4.00%
Source: Bloomberg LLC, April 1, 2019
Sugi Capital Management Inc. 2REIT MARKETS BOUNCED BACK, IN SYNC
GLOBAL REAL ESTATE STOCK PERFORMANCE BY REGION, 1Q19 (USD RETURNS)
FTSE EPRA NAREIT Developed AUSTRALIA Index
FTSE EPRA NAREIT Developed US Index
FTSE EPRA NAREIT Developed ASIA Index
FTSE EPRA NAREIT Developed UK Index
FTSE EPRA NAREIT Developed EUROPE Index
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
Source: EPRA,, the European Public Real Estate Association, April 4, 2019
Sugi Capital Management Inc. 31Q19 HEADLINES – JANUARY AND FEBRUARY January ▪ Economics: IMF cut global growth forecasts. Fed stayed on hold and sounded more dovish ▪ Europe: Portuguese government approved the introduction of REITs ▪ Asia: China saw its lowest GDP growth in a decade at 6.4%. India forecast to remain fastest-growing (7.6%) economy in 2019-20, according to UN’s report February ▪ US Politics: Agreement yet to be reached in second Trump–Kim Jong Un summit. Trump declared national emergency to build the wall. US pulled out of Russian nuclear treaty. Trump ruled out a Xi Jinping meeting ahead of March 1 trade deadline, but trade talks appeared to make progress ▪ US Retail: December US retail sales the worst since 2008. Bankruptcy court approved Chairman Lampert's bid to keep Sears alive. Payless ShoeSource to close all ~2,300 stores ▪ UK/Europe: BOE lowered 2019 GDP forecast to +1.2%. European Commission cut their forecast for Eurozone GDP from 1.9% to 1.3%. Germany factory orders reported down 7.0% and retail sales down 4.3% in December, the worst in 11 years. Italy’s GDP went negative ▪ Asia: Chinese state-run paper warned for the potential of only 6.0% GDP growth in 2019. Sri Lanka made plans to introduce REITs Sources: Bank of America Merrill Lynch, Bloomberg LLC, January, February 2019 Sugi Capital Management Inc. 4
1Q19 HEADLINES – AN EVENTFUL MARCH! March ▪ Capital markets: S&P ended its best quarter since 2009. US 3 month - 10 year yield curve inverts first time since 2007. German 10-year bund yield moved into negative territory for the first time in 3 years ▪ Economics: OECD cut 2019 global growth outlook again to 3.3% in 2019 (↓0.2%). US economy grew by 2.9% in 2018, best performance in 3 years. German 2019 GDP forecasts cut -0.7% to +0.8%. Australia unemployment fell to 8-year low. US chose to leave Chinese tariffs in place to enforce trade deal ▪ Monetary policy: Fed rates unchanged, but lowers “dot plot” from 2 hikes in 2019 to zero. Canada rates unchanged at +1.75% (shifts from hawkish stance). ECB flipped back into easing mode just 2 months after ending 4 years of QE ▪ Retail: US store closings reached 5,924, greater than 2018's full year number of 5,325. Tesla decided to close its stores, but then changed its mind. Bed Bath & Beyond rebounded >20% on news three activists were looking to replace the entire board ▪ Property: RFR / Austrian Signa reportedly bought NYC’s Chrysler Building for $150m, 81% below the price it last traded at after the ground lease rent ballooned ▪ Asia: Tokyo Feb office vacancies fall to 1.78%. Japan’s regional residential land prices were up 0.2% in 2018 YoY, first time in 27 years. India got its 1st REIT, Embassy Office Parks Sources: Bank of America Merrill Lynch, Bloomberg LLC, March 2019 Sugi Capital Management Inc. 5
US FED HAS BEEN IN TIGHTENING MODE…
US FED – BALANCE SHEET AS A % OF GDP AND EFFECTIVE FED FUNDS RATE
3.00%
Trump said April 5 the Fed 25.0%
should cut interest rates and
undertake another round of
quantitative easing (!) 24.0%
2.50%
23.0%
2.00%
22.0%
US Federal Funds Effective Rate (LHS)
1.50%
US Fed Balance Sheet as a % of GDP (RHS) 21.0%
1.00%
20.0%
0.50%
19.0%
0.00% 18.0%
10/1/2015
1/1/2016
4/1/2016
7/1/2016
10/1/2016
1/1/2017
4/1/2017
7/1/2017
10/1/2017
1/1/2018
4/1/2018
7/1/2018
10/1/2018
1/1/2019
Source: Bloomberg, LLC, April 1, 2019
Sugi Capital Management Inc. 6…WHILE EUROPE AND JAPAN REMAIN LOOSE
BANK OF JAPAN AND EUROPEAN CENTRAL BANK – BALANCE SHEET AS A % OF GDP
110.0%
100.0%
90.0%
80.0% Bank of Japan Balance Sheet as a % of GDP
70.0%
European Central Bank Balance Sheet as a % of GDP
60.0%
50.0%
40.0%
30.0%
20.0%
11/1/2014
11/1/2015
11/1/2016
11/1/2017
11/1/2018
5/1/2017
3/1/2018
1/1/2019
9/1/2014
1/1/2015
3/1/2015
5/1/2015
7/1/2015
9/1/2015
1/1/2016
3/1/2016
5/1/2016
7/1/2016
9/1/2016
1/1/2017
3/1/2017
7/1/2017
9/1/2017
1/1/2018
5/1/2018
7/1/2018
9/1/2018
3/1/2019
Source: Bloomberg, LLC, April 1, 2019
Sugi Capital Management Inc. 7A “RISING INTEREST RATE ENVIRONMENT”?
GLOBAL 10-YEAR BOND YIELDS (%)
3.50%
3.00%
2.50%
US
2.00%
Germany Despite pundits’ declarations of a
“rising interest rate environment,”
1.50% Japan
long-term yields have fallen in the
three largest sovereign markets
1.00%
0.50%
0.00%
10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019
-0.50%
Source: Bloomberg, LLC, April 1, 2019
Sugi Capital Management Inc. 8US TERM PREMIUM DROPS BELOW ZERO
US YIELD SPREAD: 10-YEAR – 3-MONTH (IN BP)
120
100
80
60
US yield
curve
40 actually
inverted
20
-
10/1/2018 11/1/2018 12/1/2018 1/1/2019 2/1/2019 3/1/2019 4/1/2019
(20)
Source: Bloomberg, LLC, April 1, 2019
Sugi Capital Management Inc. 9GLOBAL DEBT GROW TH LEVELS OFF
The pace of growth in global debt
slowed in 2018, while borrowing
by U.S. nonfinancial corporates
approached record levels
Source: Institute of International Finance, March 22, 2019
Sugi Capital Management Inc. 10GLOBAL PROPERT Y MARKETS IN 2019 Investment While investment activity showed signs of leveling off at the end of 2018, investors have indicated plans to increase their capital commitment to commercial real estate in 2019, with the United States, Germany, and Canada leading the way (Deloitte, 2019 Commercial Real Estate Outlook) Nontraditional assets (e.g. student housing, manufactured housing, single-family rentals) and business models (e.g. flexible leases and spaces) likely to increase in popularity Commercial real estate investors in the US are shifting their attention from smaller cities to refocus on major markets, a pull-back to perceived stability and lower risk amid expectations that economic growth is set to slow (Jones Lang Lasalle, Commercial Real Estate Investment Trends & Outlook, February 2019) Sectors Growth is slowing across asset classes, but some sectors affected more than others Retail is the most challenged sector globally. 2019 could be the year when we see the true impact of e- commerce on real estate demand and pricing (even worse than 2018) While retail struggles, industrial is cruising in its wake. E-commerce continues to drive demand for logistics space and investors continue to increase allocations to the sector, driving prices to all-time highs Office sector is undergoing a structural upheaval (e.g. co-working) which will continue in 2019 and beyond Steady multifamily demand continues to drive up rents. Millennials continue to embrace city living Risks Trade, Recession Sugi Capital Management Inc. 11
INVESTORS LOOKING LONGER TERM
TIME HORIZON FOR INVESTING, US REAL INSTITUTIONAL REAL ESTATE INVESTORS
Nearly 30% now have
a time horizon of 10
years or more
Source: PWC and Urban Land Institute, Emerging Trends in Real Estate® 2019, January 2019
Sugi Capital Management Inc. 12GLOBAL CITIES’ PROSPECTS VARY
GLOBAL CITIES’ GDP, INVESTMENT VOLUMES, AND PRICING COMPARISON
Year over year 2017-2018 2018 Year over year 2017-2018 2018
Source: JLL, January 2019
Sugi Capital Management Inc. 13GLOBAL CRE INVESTMENT VOLUMES PEAKING?
After a record 2018, there were signs in the final quarter that demand is
softening; investment and leasing volumes were lower than the previous
year, and this trend appears likely to continue into 2019
Source: JLL, January 2019
Sugi Capital Management Inc. 14GLOBAL OFFICE RENTS TOPPING OFF Source: JLL, January 2019 Sugi Capital Management Inc. 15
INDUSTRIAL MARKET STILL IN HIGH GEAR Source: JLL, January 2019 Sugi Capital Management Inc. 16
COMMERCIAL PROPERT Y PRICES FLATTENING…
GREEN STREET CPPI, 1999-APRIL 2019
140.0
120.0
100.0
80.0
60.0
Green Street’s Commercial Property Price Index (CPPI) is a time series of
unleveraged U.S. commercial property values that captures the prices at
40.0
which commercial real estate transactions are currently being negotiated
and contracted. Features that differentiate this index are its timeliness, its
20.0 emphasis on high-quality properties, and its ability to capture changes in
the aggregate value of the commercial property sector.
0.0
2006-01-01
2011-01-01
1999-01-01
2000-01-01
2001-01-01
2002-01-01
2003-01-01
2004-01-01
2005-01-01
2007-01-01
2008-01-01
2009-01-01
2010-01-01
2012-01-01
2013-01-01
2014-01-01
2015-01-01
2016-01-01
2017-01-01
2018-01-01
2019-01-01
Source: Green Street Advisors, April 4, 2019
Sugi Capital Management Inc. 17…BUT SECTORS CONTINUE TO DIVERGE
RCA CPPI, 2007-2018
180
160 The Real Capital Analytics (RCA) Commercial Property Price Indices (RCA
CPPI™) are a suite of price indices developed and published by Real Capital
140 Analytics. They are transaction-based and accurately measure commercial
real estate price movements using repeat-sales regression methodology.
120
100
80
60
40
12/2006
12/2007
12/2008
12/2009
12/2010
12/2011
12/2012
12/2013
12/2014
12/2015
12/2016
12/2017
12/2018
Apartment Retail Industrial Office - CBD Office - Suburban Office
Source: RCA, February 2019
Sugi Capital Management Inc. 18MOST LISTED REAL ESTATE MARKETS STILL
TRADING AT DISCOUNT TO NAV
PREMIUM/DISCOUNT TO NAV (%), BY COUNTRY
40.00
30.00
20.00
10.00
0.00
-10.00
-20.00
-30.00
-40.00
-50.00
Japan
Singapore
United Kingdom
Netherlands
Malaysia
Spain
Ireland
Belgium
USA
Mexico
France
Canada
Hong Kong
Italy
Australia
South Africa
Source: S&P Global, April 4, 2019
Sugi Capital Management Inc. 19OFFICE AND RETAIL REITS ARE STILL
CHEAPEST
PREMIUM/DISCOUNT TO NAV (%), BY SECTOR, US REITS
30.00
Prem/Disc to NAV (%) Industry Median
20.00
10.00
0.00
-10.00
-20.00
-30.00
-40.00
Casino
Diversified
Office
Other Retail
Self-Storage
Manufactured home
Health Care
Industrial
Specialty
Shopping Center
Multifamily
Regional Mall
Hotel
Source: S&P Global, April 4, 2019
Sugi Capital Management Inc. 20CLOSING THOUGHTS
▪ Market risks dissipated as the calendar turned to 2019
▪ Nearly all asset classes bounced back, including REITs
▪ Equities, including real estate equities, performed best
▪ Bonds lagged equities and commodities but still delivered positive returns
▪ Central banks’ tunes changed
▪ US Fed turned slightly more dovish
▪ ECB U-turned on QE to support European economies
▪ Yield curve inverted, causing some to worry about a recession
▪ Global REIT markets rising and falling in sync despite divergence in physical markets
▪ Industrial and residential performing well operationally, while retail and office grind through secular changes
▪ Niche asset classes continue to fare well
▪ Regional market performance very highly correlated
▪ Market pricing suggests that the market is not appreciating REIT subtleties such as asset quality, balance sheet,
management, size, growth, location, and risks
Growing pricing discrepancies between the public and private markets = opportunities for investors
that invest in both
Sugi Capital Management Inc. 21THANK YOU!
For more information, contact us at:
info@sugicapital.com
Sugi Capital Management, Inc.Sugi Capital Management Inc.
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