Property funds shine in falling equity markets

As always, developments in the equity market have had a powerful influence on the investment decisions made by fund managers specialising in property. With the slower equity returns of late, property has become more attractive.

Certainly, following the rout of the technology sector on the equity market since last April, listed property trusts were star performers last year, offering among the best returns of any sector in Australia's share market.

Another major factor influencing the outlook for property securities has been interest rates. Lower rates might have caused some investors to rotate investments away from listed property securities but overall lower interest rates are a positive for the property sector.

Then the underlying property market itself is strong on the fundamentals when supply and demand factors are considered, particularly commercial property.

Rothschild Australia Asset Management is the winner of the property fund category. There were nine eligible managers in this class.

Rothschild spokesperson Rob White says that as a defensive asset class typified by high yields, low volatility, good cash flow, property has had a good run. He points out that the year also saw nine mergers or take-overs among property trusts and the buy-back of management rights from external managers.

"Our edge was to pick stocks well. This is based on a value assessment relative to each other and the internal issues of the particular trust."

Assirt associate director Anthony Serhan says the top managers in the property securities class had large teams and resources dedicated to the property sector.

"They have given it some serious attention. It is not a side involvement for them," he says.

They also tend to define their property universe more broadly. Stuart Cartledge, portfolio manager at Salomon Smith Barney Asset Management, runners-up in the property securities category, says the manager values every security.

"Our process is valuation driven. We develop a detailed model for every security where our insights are quantified. These are long-term valuation models as property is a long-term asset class. Stocks are then ranked against each other."

He adds that Salomon looks at smaller capitalised property stocks.

As for third-placed Colonial First State, head of property securities Stephen Hayes explains that Colonial also commits "huge research" into developing its own entry universe of stocks.

"We do not rely on broker reports and thus come to our own conclusions using our own numbers. Our universe is ranked according to our criteria."

Colonial is too an active selector with a broad pool of stocks.

"We do not hold poor quality stock which is expensive relative to our universe."

Australia's commercial property markets are in their best shape for a decade. Few markets are oversupplied, interest rates have fallen, and the only concern is the threat of economic slowdown. Most anticipate the property market to remain strong for the next five years.

Most analysts expect the property trust sector to deliver total returns for the year of 10 to 12 per cent, made up largely of income. The underlying yield for the sector is about 8.2 per cent, tax-advantaged, but with some income growth - about 2.5 to 3 per cent - and some capital appreciation.

In the broader property market, there is not only a greater focus on property but a drive to find alternative vehicles to access the property sector. This involves not only property trusts but direct commercial property, syndicates and alternative property offerings that are being creatively structured to meet different needs in accessing investments into property.

Property Funds

Rothschild

Salomon Smith Barney

Colonial First State