Reitway Global | Monthly Commentary | October 2023

November 7 2023

  • The GPR 250 REIT World Index endured a challenging period, relinquishing -5.0% of its value.
  • All sectors in the GPR 250 REIT world index saw declines. The top-performing sector was Specialty, returning -0.6%.
  • Focusing on solid company earnings and guidance will help us weather the storms and navigate the ever-changing landscape of the global economy.

Market Commentary

October proved to be a month to forget for investors as the GPR 250 REIT World Index endured a challenging period, relinquishing -5.0% of its value. Earnings season played a pivotal role in shaping these dynamics, as companies reported their financial results and provided insights into the overall health of the real estate market.

Geopolitical tensions initiated in the month overshadowed many markets leading to weak market returns despite certain sectors and geographies displaying strengthening fundamentals.

All sectors in the GPR 250 REIT world saw declines, with the top-performing sectors being Specialty (-0.6%), led by companies across various specialisations like EPR Properties (Entertainment REIT), Digital Realty (Data Centre REIT), and Gaming and Leisure Properties (Gaming REIT).

Regional Malls (-1.2%) and Shopping Centers (-1.6%) were the next best sectors due to stronger operating fundamentals and robust leasing activity, boosting overall sector sentiment during earnings season.

Conversely, the worst-performing sectors included Self-Storage (-10.9%), impacted by larger-than-expected declines in move-in rents; Industrial (-8.1%), experiencing decreased near-term demand and occupancy rates; and Office (-7.3%), particularly in U.S. REITs, facing challenges in the leasing environment, leading to sector-wide pressure.

In terms of geography, the top-performing regions in October included South Africa, which saw a relatively modest decline of -1.3%, with a strong finish due to a strengthening rand and a decrease in the South African 10-Year bond yield. Following closely were Spain (-1.8%) and France (-2.1%). On the other hand, the worst-performing regions included Canada, with a significant -10.0% decline, driven by major companies receiving analyst downgrades following recent earnings releases, tailed closely by Mexico (-9.3%).

Australia (-8.6%) underperformed primarily due to concerns about potential interest rate hikes, prompted by stronger-than-expected CPI data.

Healthpeak (PEAK) and Physicians Realty Trust (DOC) have announced an all-stock merger, resulting in a combined enterprise value of $20 billion. DOC shareholders will receive 0.674 shares of PEAK for each DOC share, with no premium offered by PEAK. The new entity will be led by PEAK's CEO and CFO, with DOC's CEO as Vice Chair of the Board.

The deal aims to achieve cost efficiencies through corporate overhead and market-level synergies, particularly by reducing third-party management fees for medical office properties. The deal is viewed as less advantageous for legacy DOC shareholders who are not receiving a premium for their shares, leading to questions about why DOC did not explore other avenues to maximize shareholder value, possibly by selling to a buyer willing to pay closer to NAV for its portfolio.

Realty Income (O) and Spirit Realty (SRC) have unveiled a $9.3 billion all-stock merger, with the deal expanding O's portfolio by 15% and offers SRC shareholders a 15% premium to their unaffected share price, representing an attractive opportunity for SRC investors.

The combined entity will boast an enterprise value of approximately ~$63 billion, with existing Realty Income shareholders owning an 87% stake, which implies significant scale and diversification benefits. Shares weakened following the announcement however, despite some market reservations, the merger holds the potential for long-term value creation and strategic advantages.

Several industrial real estate transactions have taken place recently across Europe, signalling continued activity in this sector despite a challenging macroeconomic environment. Sagax acquired a French portfolio of 47 light industrial properties for SEK 930 million, offering a 7.5% yield. Tritax Big Box sold an 850k sq ft warehouse in Corby for approximately £100 million at a 4.5% yield. KKR acquired its first French logistics assets for €140 million, yielding around 5.3%.

Sagax also acquired ten properties across Spain and France for SEK 425 million, reflecting a gross yield of approximately 6.1%. These transactions highlight the resilience of the industrial real estate market and the appeal of logistics properties to various investors, including private equity firms like KKR and traditional real estate players like Sagax.

The 10-year U.S. Treasury yield experienced a significant surge in October 2023, briefly exceeding the 5% mark, a level not seen since July 2007. This increase in yields was primarily driven by solid economic data and strong U.S. retail sales for the month, which reinforced the possibility of the Federal Reserve maintaining higher interest rates for an extended period.

Federal Reserve Chairman Jerome Powell's comments left the door open to additional rate hikes, while other Fed officials suggested that the tightening cycle might be coming to an end. Geopolitical tensions in the Middle East, especially the conflict in Israel and Gaza, further contributed to dampened investor risk appetite. As a result, stock markets, particularly the Nasdaq, experienced losses, and the rise in yields had an impact on various financial markets, including the bond market and the U.S. dollar.

In the tumultuous month of October 2023, geopolitical tensions added to the mix, contributing to overall uncertainty and market fluctuations. Despite the short-term challenges and market volatility, it is essential to maintain a long-term, high-conviction approach in our investment strategy.

Focusing on solid company earnings and guidance will help us weather the storms and navigate the ever-changing landscape of the global economy.

Click here to download the October Commentary (PDF)

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Although all precautions have been made to ensure the reliability of data and information contained in this presentation, Reitway cannot guarantee the reliability thereof. Past performance referred to in this presentation is not necessarily indicative of future performance. Similarly, forecasts contained in this presentation involve risks and uncertainties which may result in future performance, outcomes and results which differ materially from such forecasts. You are accordingly cautioned not to place undue reliance on any historical data, general information or forecasts used in this presentation.

Reitway accepts no liability whatsoever for any loss, damage (direct or consequential) or expense suffered by a recipient as a result of any reliance placed on any information contained in this presentation or any opinions expressed during this presentation. The views, opinions and comments reflected in the presentation represent those of Reitway, associated companies and employees.

Reitway Global (Pty) Ltd

Registration No: 2011/125542/07. A Financial Services Provider licensed under the Financial Advisory and Intermediary Services Act, 37 of 2002. FSP license No: 43747. The full details and basis of the awards are available from the manager.

Boutique Collective Investments (RF) (Pty) Ltd (“BCI”) is a registered Manager of the Boutique Collective Investments Scheme, approved in terms of the Collective Investments Schemes Control Act, No 45 of 2002 and is a full member of the Association for Savings and Investment SA.

Collective Investment Schemes in securities are generally medium to long term investments. The value of participatory interests may go up or down and past performance is not necessarily an indication of future performance.  The Manager does not guarantee the capital or the return of a portfolio. Collective Investments are traded at ruling prices and can engage in borrowing and scrip lending.  A schedule of fees, charges and maximum commissions is available on request.  BCI reserves the right to close the portfolio to new investors and reopen certain portfolios from time to time in order to manage them more efficiently. Additional information, including application forms, annual or quarterly reports can be obtained from BCI, free of charge.

A feeder fund is a portfolio that invests in a single portfolio of collective investment schemes, which levies its own charges, and which could result in a higher fee structure for the feeder fund.

Performance figures quoted for the portfolio are from Morningstar, as at the date of this document for a lump sum investment, using NAV-NAV with income reinvested and do not take any upfront manager’s charge into account.  Income distributions are declared on the ex-dividend date. Actual investment performance will differ based on the initial fees charge applicable, the actual investment date, the date of reinvestment and dividend withholding tax. Past performance referred to in this presentation is not necessarily indicative of future performance.

Investments in foreign securities may include additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information.

Boutique Collective Investments (RF) Pty Ltd retains full legal responsibility for the third party named portfolio.

Although reasonable steps have been taken to ensure the validity and accuracy of the information in this document, BCI does not accept any responsibility for any claim, damages, loss or expense, however it arises, out of or in connection with the information in this document, whether by a client, investor or intermediary.  This document should not be seen as an offer to purchase any specific product and is not to be construed as advice or guidance in any form whatsoever.  Investors are encouraged to obtain independent professional investment and taxation advice before investing with or in any of BCI/the Manager’s products.

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