The FTSE EPRA/NAREIT Developed Rental Index recorded a net total USD return of 4.27% in June. The best performing listed real estate market was Hong Kong, which recorded a total USD return of 10.99%. The UK recorded the lowest total USD return for June of -17.52%.

For the first six months of 2016 the FTSE EPRA/NAREIT Developed Rental Index recorded a net total USD return of 10.80%. The best performing listed real estate market for this period was Japan, which recorded a total USD return of 25.53%. The UK recorded the lowest total USD return of -21.24%.

This last month saw the historic decision made by the UK public to exit the European Union, which shook the global markets, particularly the UK real estate market that has suffered a negative 21% USD return between June 23rd and month end. While the eventual outcome of the referendum remains uncertain and is reliant on numerous unknowns, we have a few take away points with regards to property fundamentals in the UK.

We have concerns around London office rents coming off, not purely due to a reduction in demand for space as a result of Brexit (should it eventually occur), but also due to 1) the amount of new office supply coming online, predominantly in London City, and 2) London office rents being at cycle peak levels. These last two concerns have been on our team's radar for some time now, but the outcome of June 23rd will further aggravate these negative repercussions for London real estate. We expect supply via uncommitted development pipelines to largely be reduced post Brexit, given the uncertainty around demand and the amount of space businesses are likely to take up in the interim, the delay in global investment into the UK, and the potential negative impact on GDP and jobs (in the financial services sector in particular). We anticipate office vacancy levels to increase over the medium term - particularly in the City of London where the threats of supply and job losses are the highest. This should translate into negative rental assumptions over the next few years and will negatively impact property valuations in the UK. Potential rate cuts and quantitative easing by the Bank of England, together with a weaker sterling, may partly offset some of these concerns for real estate as foreign investors continue to search for yield and value.

In June we had a number of management meetings at the NAREIT Conference in New York and toured various assets across New York, Boston, Washington D.C., Los Angeles and San Francisco with management teams. Overall, real estate fundamentals remain sound, although market participants are leaning to a stance that is progressively 'cautiously optimistic,' citing areas for both opportunity and concern.

Medium term earnings growth prospects for global real estate stocks remain relatively robust, predominantly due to the lag effect of long term leases and solid current fundamentals. In light of this, the estimated forward FAD (Funds Available for Distribution) yield of 4.67% for listed real estate looks attractive considering the yields at which global bonds are currently trading.