Direct property preferred: Funds look for stability in allocations

Property has proved a nice little earner for Australian superannuation funds over the past three years - just look at the returns as measured by research houses such asInTechandSuperRatings.

But according to major players such asRussell Investment GroupandFrontier Investment Consultantsproperty, particularly listed property, is not looking such a great investment option over the next 12 to 18 months.

The less than optimistic outlook for property is likely to cause a reshaping of asset allocations within a number of superannuation funds, not least those which have dedicated substantial resources both directly and via listed vehicles.

Those funds includeUnisuperwhich has adopted what many industry observers regard as a pace-setting approach to property investment with a portfolio which includes a mix of both listed interests and direct investment.

A measure of the Unisuper approach has been its 100 per cent ownership of the Malvern Central Shopping Centre and 50 per cent ownership of properties such as Macquarie Place in Sydney plus exposure to the Commonwealth Property Trust.

The managing director of Frontier Investment Consultants, Fiona Trafford-Walker acknowledges that property has been a significant contributor to the double-digit returns recorded by Australian superannuation funds over the past two years but suggests that direct property represents a better option, particularly with respect to stabilising portfolios, moving forward.

According to Trafford-Walker, the problem with Listed Property Trusts (LPTs) is that they have taken on too much of the risk profile of equities and for that reason simply don’t have a stabilising effect on portfolios.

“We regard direct property as a stabilising asset class for fast-growing superannuation funds, particularly those that can overcome the illiquidity issue,”she said.

Russell Investment Group may not entirely agree with Trafford-Walker’s analysis on property but its recently released Manager Outlook survey makes clear that it no longer sees the listed property trust sector as a premium investment environment.

The Russell survey, which measured the views of around 40 Australian-based investment managers, tends to confirm the Trafford-Walker view that LPTs have taken on an equities-like risk profile.

Commenting on the survey outcome, Russell Investment Group Chief Investment Officer, Asia-Pacific, Peter Gunning said the listed property trust sector, which had been“a darling of investors over the last few years”, appears to have lost much of its appeal.

“While listed property trusts may have been the best performing asset class over the past decade,t he investment management community has now checked its enthusiasm with over two-thirds of managers now bearish on the sector and less than 10 per cent bullish,”he said.

Gunning attributed this change in attitude to LPTs to:“An exceptionally strong performance run combined with a slew of corporate actions, an increasingly high stock specific concentration in the sector, more development risk and a growing international listed property trust market.”

Looking at the outlook for Australian investors, Gunning suggests that those investors who believe investment managers’perspective is valid“might consider shaking off their affection for domestic asset classes such as Australian equities and listed property trusts and rebalancing their portfolios to international asset classes.”

Trafford-Walker, while advocating direct property via pooled funds as being preferable to listed property trusts, acknowledges that the values being placed on some domestic property assets means that there has been an increasing tendency to look overseas.She said that when looking offshore there was a need to look carefully at a range of issue capable of impacting returns.

While many advisors are advocating that superannuation funds and other investors look overseas for more remunerative property opportunities it is those countries which regulatory environments closest to those in Australia which have tended to attract particular interest.

Those countries include the United Kingdom and Canada and, to a lesser extent, the US.

The Trafford-Walker and Russell assessment of the uncertainty of the LPT sector over the next few years has been validated by InTech Investment Consulting which (elsewhere in this edition ofSuper Review) has pointed to the manner in which consolidation has seen the sector become more concentrated.

InTech said that, in addition, there had been increased leverage and greater exposure to development projects to supplement rental income and overseas assets - factors which have resulted in the expectation that returns from Australian LPTs will be morevolatile in the next decade than in the previous one.

InTech have similarly pointed to this consolidation leading to Australian institutional investors increasingly looking overseas.

A similar view has been taken out the retail investment level, with group such as Bridges Financial Services which has pointed to the recent out-performance of LPTs and suggested that investors should be considering alternatives such as private equity or infrastructure bonds