So much for property’s reputation as a low-risk compromise between equities and bonds. The FTSE 350 real-estate investment trusts (Reits) raced ahead of a very buoyant stock market in the first half of May, only to plunge back in the second half amid fears that quantitative easing (QE) would not work in Japan and might be phased out in the US. They finished the month up 3 per cent – just ahead of the wider market.
Real estate has been a prime beneficiary of monetary expansion ever since the experiment began in 2009. Property companies benefit from depressed gilt yields both directly, because they can borrow more cheaply, and indirectly, as the bar against which investors judge their returns is set very low. Some investors may also be buying them as a tonic for inflation fears: the fixed-cost debt books that back most property portfolios make them an imperfect yet sensible hedge against rising prices.
Tellingly, the Reits underperformed in the first quarter, only to make up the lost gains and more after the new governor of the Bank of Japan, Haruhiko Kuroda, unveiled a radical new series of policies to expand the country’s monetary base on 4 April (see chart, below). Even after the recent correction British Land (BLND) and Land Securities (LAND) trade at premia over spot book value despite offering modest growth prospects – a highly unusual situation.
But few have been brave enough to call the end of the party. Mike Prew, a veteran analyst now at Jefferies, has been the most consistently bearish. “Reits are on the financial rack with rising bond yields as the global QE placebo effect is fading,” he thundered in his June monthly update. But even he has been reluctant to issue outright sell recommendations.
