Listed property goes global

Listed property trusts (LPTs) were the darling of the Australian market in 2004, returning 32 per cent. No one believes there will be a repeat performance in 2005, but more than a handful of new global property securities funds launched in the past 12 months are providing wider options for property investors. So are Australian LPTs yesterday’s news? Is global property the new black?

The past year was unique for Australian LPTs, with several factors giving the sector a significant leg-up.

An ongoing favourable interest rate environment, reasonable yields, positive consumer sentiment about the asset class, particularly with regard to its defensive properties, and considerable corporate merger and acquisition activity, which attracted money into the sector and pushed prices higher, contributed to the sector’s stellar performance.

Van Eyk Research analyst Dennis Mothoneos says: “We’ve gone from around 29 securities in the ASX 200 Property Index to about 21. It’s illustrative of just how much consolidation activity has occurred in 2004.”

Increasing risk

However, APN Funds Management manager of property securities Mike Doble warns that many of the factors contributing to the recent outperformance were not generated by fundamental property drivers.

“There was a lot of risk introduced into the sector with merger and acquisition activity, driving the market to look for greater growth, probably more growth than simple property as an asset class should ever offer,” Doble says.

Corporate activity by major players such as Westfield and Multiplex has also given rise to significant risk in the market.

“Westfield put Westfield Holdings and the two property trusts together, and not only introduced international property risks but also obviously the other risks that go with the management company of Westfield Holdings,” Doble says.

“Another example of the risks introduced last year was the construction risk within Multiplex, and that is now being shown to be a stock which is very risky. It fell 20 per cent last week on the strength of news of their problems with Wembley Stadium.”

So while analysts and fund managers are expecting to see continued strength in the LPT sector, it’s certainly not the safe haven it used to be.

“The sector is becoming more risky for many reasons. Once people stop to take a breath, like I think they did with Multiplex, they will probably realise the sector has changed and they’re not getting the risk adjusted returns that they thought were there,” Doble says.

Returns for 2005

While yields are expected to stay strong, it is unlikely that LPTs will continue to deliver return in the region of 30 per cent.

“Listed property returns should never be providing these sorts of total returns, so we see the market normalising this year, with total returns in the order of 7 to 9 per cent, made up of 7 per cent income and 2 per cent capital growth,” Doble says.

Research company Property Investment Research is forecasting a return for LPTs in 2005 of between 8.5 and 11.5 per cent, according to head of listed securities Paul Pavlidis.

Part of the reason for a drop in anticipated performance, Mothoneos says, is that the Australian property market is currently overvalued. And this, together with the increased risk of the Australian sector and supply and demand issues, is making global property start to look attractive to investors.

Global property

Intech head of research Hugh Dougherty says the asset consultant is seeing increased demand from clients for research in the global property space.

“People who are currently invested in LPTs in Australia are concerned about some of the rising risk characteristics that are emerging. There is also a second driver which is more global, and that is that people are interested in instruments that have somewhat lower volatility than listed equity investments — nonetheless with significant income potential — and that is where global property fits in,” Dougherty says.

The consolidation in the sector has also meant that diversification has been lost, creating the potential for excessive exposure to individual stock.

Investing in global property, by contrast, can provide both geographical diversification by investing in different regions, or diversification by type of property.

Deutsche Asset Management head of listed property securities Danny Ekins says: “In the US, which has the most mature real estate investment trust (REIT) market, there is a large residential sector that is part of the REIT space, and a significant hotel sector as well, and those are two sectors you can’t really get exposure to in Australia.”

Property securities are generally regarded as having a low correlation with equities and bonds, further adding to the diversification benefits. But Mothoneos says that while this is true in the short-term, property is quite highly correlated with equities over the longer term.

“I don’t think this is highlighted to financial advisers in Australia adequately, and they may end up disappointed,” Mothoneos says.

Improved access

There are also movements in global markets that are making it structurally easier for investors to access international property. Australia, together with the US, is one of the most sophisticated securitised property markets, but in the past it has been difficult to access property in the UK, Europe and Asia, because they did not share the same transparent, tax-efficient structure as vehicles in Australia and the US. That is now starting to change.

“More recently in Europe and Asia, there has been a push to create the sorts of structures that Australian investors are very comfortable with, in terms of LPTs and the tax efficiency of those types of investments,” Dougherty says.

Hattersley also believes we’re on the brink of a brave new world.

“We’re just at the beginning of a process where the global property market is really opening up to be securitised and for the average mum and dad to get exposure to real estate of all types and in all geographies.”

Many product providers in Australia are not waiting for the new dawn — instead creating or leveraging global capabilities or alliances to provide new global listed property trusts or property securities funds.

In recent months, AMP Capital Investors, Deutsche Asset Management, BT Financial Group, Colonial First State and APN Funds Management have all launched new products in this space.

Ekins believes the current wave of interest has more to do with investors’ needs and attitudes relating to property than the impending structural change.

“We’re doing it now and yet the REIT legislation has not been introduced in UK/Europe, it has been mooted but there is no undertaking, and it has not been widely introduced in Asia.

“I think what’s driving it is that in people’s minds, property has reached that stage of maturity, and like other asset classes, it has become increasingly securitised, which obviously creates the possibility of having a liquid tradeable allocatable global exposure,” Ekins says.

“Together with the appetite for yield, this has made global property very popular at the moment.”

Investor benefits

So what can investors expect from these new products?

Ekins says the outlook for the Australian LPT sector is for an 8 to 10 per cent total return, with the North American market expected to show a return on the lower side of that, and the global products — with around 65 per cent benchmark exposure to the US — to show a similar return.

“On a longer term the return prospects are better as we see the introduction of REIT legislation and therefore growth in the UK, Europe and Asian markets. So the long-term growth differential would be in favour of the non-Australian component.”

ING technical manager Margaret Callinan says although the capital value of property can be quite volatile, yields are expected to remain fairly consistent, so it can be a good choice for investors needing steady income from their portfolio, particularly retirees, as long as money is invested in the sector on a long-term basis.

While the Australian LPT market has become overvalued, Mothoneos says this is also something for investors to be aware of when looking offshore.

“The magnitude of overvaluation is probably greater overseas than in Australia, and the yields are lower overseas. There’s also the added factor of currency, so investors should be mindful of currency fluctuations in their returns.”

Other factors investors should watch out for if they are interested in global or Australian listed property are interest rates, which can put pressure on LPTs, the level of the Australian dollar and currency hedges, and the risks associated with increased merger and acquisition activity.

It is no wonder then that some managers take a contrarian view to the push towards global listed property.

Property manager SAITeysMcMahon is one group that believes offshore LPT investments should be weighed up against emerging opportunities in Australia, particularly unlisted property ventures.

“We never rule anything out. But if we can find around 10 per cent plus performance here at home, it means that overseas assets would need to be offering very juicy yields indeed to taste any sweeter,” SAITeysMcMahon head of agribusiness Stephen Lynch says.

Nevertheless, Intech’s Dougherty says there is still value to be gained in Australian LPTs.

“We don’t believe you should sell down your Australian LPT assets and run to this new world of global listed property securities. It’s an emerging market and people will probably want to take their time on it.”

“We think it’s appropriate that people look at it right now, and think about how they bring it into their portfolios over the next year or so. Certainly time is on your side even from this point looking forward in terms of absorbing the information you need to invest in this area.”