Around this time in 2018, global real estate securities markets were under serious, short-term pressure, ahead of a series of consecutive interest rate hikes that were expected to occur throughout 2018 and potentially 2019.
The anticipatory nature of public markets led to a quick market correction, albeit only in the public domain, resulting in a double-digit gap in valuation as measured by discount to net asset value in comparison to private market valuations. Pricing in the private real estate markets did not adjust for such a risk and remained steady. Publicly traded global real estate markets were thus down sharply, around -8-10%, with the US leading the way in the first two months of 2018. Real estate markets globally screened as one of the worst performing asset classes at that time.
We have cautioned that such severe moves are not unusual in the public real estate domain. However, we added that similar movements in previous years have not derailed the asset class. We also noted that such moments in the cycle were opportune to continue building up exposure to the asset class, in particular when a notable gap exists between the valuation of real estate equities and general equities, as well as public real estate and private real estate markets.
Needless to say, headlines were shortly thereafter dominated by another important theme in 2018: the trade war between the USA and China. Protectionism and the destructive potential of global trade altered the thinking and moods in capital markets starting in early March 2018. The trade war started to be perceived as more detrimental to other global equities sectors exposed to global supply chains, rather than to locally defined property markets. Even though real estate securities markets are not immune to negative consequences linked to the trade war, the defensive characteristics of the property sector, combined with relatively cheap valuations in early March 2018, led to a significant differential in performance between general equities, global fixed income and global real estate securities.
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