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Emerging market real estate takes the lead in Q1

Real estate investment trusts (REITs) have long been popular in the US and have also been gaining popularity globally over the last decade, as we discussed in an earlier blog. Now listed on exchanges around the world, REITs can be analyzed similarly to other listed equities, both on a regional and country-specific basis.

The global real estate sector in the first quarter of 2017 saw an unlikely hero emerge from the pack as listed real estate equities in emerging markets rose strongly. Drilling down even further, we can use the more granular country-specific performance to understand more clearly why this happened.

The FTSE EPRA/NAREIT Global Real Estate Index Series® is designed to track listed real estate equity performance in the various regions and countries around the globe. As we show below, the FTSE EPRA/NAREIT Emerging Index posted gains of 13.18% for Q1 2017, outperforming the FTSE EPRA/NAREIT Global Index by 11.21%. Within emerging markets, the main contributors to this outperformance came from the Americas and Asia Pacific regions while the EMEA regions detracted from it.

Source: FTSE Russell, data as of March 31, 2017. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

The total return for the FTSE EPRA/NAREIT Global Real Estate Index Series is composed of two main components – price return (capital appreciation) and income return (dividend payments). In addition, since the FTSE EPRA/NAREIT Emerging Index is based in euros, currency fluctuations may also influence overall index performance.

"A closer look at first-quarter, country-specific performance within the FTSE EPRA/NAREIT Emerging Index reveals three key country-specific contributors: China, Brazil and Mexico,” Ali Zaidi, Director of Research & Indices at EPRA, said. “Each of these countries posted strong gains during Q1 while also maintaining a relatively large weighting within the index." -

Different factors contributed to the Q1 2017 performance of listed real estate equities in each of these countries although it is fair to say that they all benefited from a relatively robust economic outlook.

FTSE EPRA/NAREIT Country-specific, Regional and Global Total Returns for Q1 2017

Source: FTSE Russell, data as of March 31, 2017. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

China’s listed real estate sector has been highly influenced by an overall optimistic view of its property markets and economic growth. The optimism was not unwarranted as the residential property markets within China saw continuous growth over the last year and the Q4 GDP report came in stronger than expected.[1] Property market growth has been fueled by strong expansion in China’s largest cities, capital injections from the central bank and new regulations that allow local governments to play a more active role in property markets.

Brazil faced several economic reforms in the last year that may have had a positive impact on the economy and real estate sector in the first quarter. A new requirement that reduces government spending over the next ten years has been interpreted as an opportunity for the private sector in investment and development projects. The Brazilian central bank also decreased its key interest rate by 200 bps since October 2016,[2] representing strong support for investment and consumption. Finally, new reforms in the pension system are expected to improve the role of pension funds in the Brazilian economy.

In Mexico, the US's less aggressive stance on possible changes in the commercial and economic relations between the two countries sent encouraging signals, as did Mexico’s positive Q4 2016 GDP report which showed that actual performance beat analysts’ expectations.[3] The Mexican peso also appreciated strongly against the euro, by more than 8% for the first quarter of 2017.[4]

As demonstrated by our short analysis of the Q1 2017 performance of listed real estate equities in emerging markets, it can be helpful to analyze the global real estate market on a regional and country-specific basis. This breakdown can aid market participants in understanding which regions or countries are driving the performance of the overall listed real estate market and why.

Read more on the FTSE EPRA/NAREIT Global Real Estate Index Series.


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[1] http://www.reuters.com/article/us-china-economy-gdp-idUSKBN15406C

[2] https://www.bcb.gov.br/Pec/Copom/Ingl/taxaSelic-i.asp

[3] http://www.focus-economics.com/countries/mexico/news/gdp/revised-data-sh...

[4] https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference...

 

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