Listed property: Taking the global route

The rout in the Australian real estate investment trusts (AREITs) market and its shrinking stock universe may prove to be a major blow to the pre-eminent position of these investments in local investors’ portfolios.

Investors are increasingly turning their attention to global REITs (GREITs) as a way to improve the diversification in their listed property allocations.

Major superannuation funds like the $22 billion UniSuper fund have already made the switch and many asset consultants are urging other investors to consider the notion.

According to Adviser Edge head of property research Louis Christopher, there is growing interest in investing in GREITs.

“With AREITs there are inherent problems in the stock universe. It is small and heavily skewed by the likes of Westfield. GREITs provide a chance to look at options to increase the universe,” he said.

The AREIT market is now highly concentrated, with the four largest REITs constituting almost 80 per cent of the sector. Westfield alone can contribute almost half the total market cap at any time.

On the other hand, the GREIT market is approximately 10 times the size of the AREIT market capitalisation and contains around 800 stocks diversified by sector and country.

Invesco Australia chief executive Mick O’Brien agreed investors are becoming more interested in GREITs due to the high stock concentration in the AREIT market, which leaves investors without proper stock and sector diversification.

“The gold rule in investing is diversification to reduce volatility and risk in the portfolio,” he said.

“If you allocate a significant amount to listed property, then you allocate almost all of that to four or five stocks.

“The concentration [in the AREIT sector] makes it a large bet and a bet on Westfield, GPT, the CommBank trusts, Stockland and Mirvac. There is nothing wrong with those names and they are very good companies, but it is a small number of companies.”

Pointing to the huge impact on investors’ portfolios when Centro collapsed, O’Brien argued GREITs provide better diversification at both the stock and regional level.

“The benefit of taking a global basis is greater diversification and it removes single property risk.”

Recognising the shift in interest towards global listed property, Invesco Australia recently changed the benchmark for its Invesco Wholesale Global Property Securities Fund to include Australian REITs.

In the FTSE EPRA/NAREIT Developed REIT Index (Hedged) used by the fund, Australia represents 8 per cent of the index, with Asia more than 30 per cent and the US about 34 per cent.

“It is a very diversified index,” O’Brien explained. “We are seeing the global REIT universe continuing to expand.”

With the Chinese Government tipped to legislate to allow fund managers and brokerages to publicly trade REITs on the Shanghai and Shenzhen exchanges next year, the diversification opportunities provided by GREITs are increasingly appealing to

Australian investors.

“We are seeing lots of interest in GREITs. In the institutional market the transition [to GREITs] is 50 per cent to 60 per cent complete, but the transition in the retail market is at the embryonic stage,” O’Brien said.

Invesco believes a taking a global approach to REITs may improve the risk/return profile of an investor’s listed property investments.

“GREITs are likely to produce more consistent returns than just Australian REITs,” O’Brien said.

Atchison Consulting has encouraged this trend among its large institutional and superannuation fund clients, according to managing

director Ken Atchison.

He believes clients are increasingly questioning the logic that AREITs are the best way to get exposure to good properties in overseas markets. “A better way to get global exposure is to look back to Australia as part of a global allocation,” he said.

This way you are getting the best properties, not the best properties available via the

Australian sharemarket, he said.

Christopher also advocates taking a regional approach to Asia Pacific as it provides the benefits of a broader stock universe.

— Janine Mace