Well, if ‘a week is a long time in politics’ (and even longer in UK politics!), it’s also a long time for the listed global real estate sector. Ironically as a property developer moved into the White House last autumn, the sector badly underperformed as equity investors switched into reflation trades and bond investors headed for the hills. For investors who still think real estate is a good inflation hedge, its been a harsh lesson – as inflation comes through, bond yields typically rise and the sector in most cases gets caned at least short term.

But four months into the year, the ‘Trump bump’ has run out of steam on Obamacare and the global real estate sector (TR +6.5% in USD) has marginally outperformed global equities YTD (+6.1%). Emerging market real estate (+18%) leads the way, with Asia-Pacific (exc Japan) up strongly (TR +11%). US real estate is now underperforming (unsurprisingly given tight FFO yields) but the significant change is that the UK real estate sector is outperforming (+10.7%), helped by the recent pop in sterling on the back of the Prime Minister’s call for a snap election, and growing concern over the potential outcome of European elections. Ignoring currencies, the UK sector has even outperformed domestic UK equities (+6.8% v +2.2% YTD).

So when equity markets want to believe in growth and a rising yield curve the sector underperforms, but when equity markets are looking for more defensive bond proxies the sector is quickly back in favour and equity issuance immediately picks up! The exception to this is Asia where real estate is very much a growth and cyclical asset class thanks to its residential and development components, and I’m pleased to have participated in the rallies in Australia, China and Singapore (and not to have invested in Japan where the sector remains an enigma). But I failed to catch the bounce in Hong Kong – I find this market difficult to read from London (in spite of good disclosure and the detailed market research available) given its juxtaposition – sandwiched between volatile market sentiment on China growth v Fed policy on US rates.

I started the year with major contrarian plays v the EPRA/NAREIT global real estate sector, and in particular under-invested, underweight the US, and underweight the retail sector (the dominant listed exposure). I have been slowly investing back into the UK and Asia but I remain underweight the US and retail.

The value destruction in retail remains the biggest challenge to the sector worldwide. In the UK we have the highest penetration of retail sales via the internet than any other country on the planet, and so UK investors (both real estate specialists as well as equity generalists and income investors) have been quick to back the clear winners in logistics: Segro, LondonMetric and Tritax. But it would appear only this year that the rest of the world has woken up to this threat. To be fair to the mall majors (the likes of Simon Property Group, General Growth, Westfield, Unibail and Klepierre), all have been on top of this dominant trend for several years, in particularly selling smaller and medium sized malls, embracing technology and leisure to create shopping experiences to compete with the internet and the huge growth in big-box and last mile logistics. But many of the smaller players struggle. As rents plateau (at best) and non-recoverable costs increase, the pressure for economies of scale and M&A can only intensify. And so while I remain underweight retail, the chances of corporate activity have also increased. It’s nearly 30 years since Hammerson saw off Rodamco’s approach at c.1100p per share, and I recall the London analysts being wined and dined on Concorde while showing off the New York and Canadian assets. A lot has changed since then, to Hammerson’s strategy, portfolio and management (and to the regulation of analysts!), but for mid and smaller retail plays consolidation and take-privates are on the agenda.

Meanwhile the growth in Amazon and the other online guerrillas continues. In the UK we are now used to 0.5msf-1msf (plus mezzanines!) lettings, but on continental Europe there is a loud wake-up call coming. The online retailers are scouring major motorway junctions to secure mega sites – and smaller mall owners in denial are in for a shock, particularly those who have been complacent with their equity (non pre-emptive issues at discounts to NAV are hard to justify at the best of times).

As if this wasn’t enough, two other major factors send alarm bells ringing. Inflation is picking up and consumers are starting to feel this. Thankfully interest rates are rising only slowly and the oil price remains relatively subdued, but the impact is already there to see. But there is a more fundamental problem for retailers and retail landlords to grapple with – the millennials do not consume in the same way as their parents. The current generation of consumers want experience rather than 80s style consumption, and are embracing the shared economy. This is a structural change and, as a result, alternative asset classes are increasingly important to both real estate and global real estate equity investors.