Morningstar delivers outlook for global listed property

Morningstar has warned that investors in fully-hedged global property funds should expect “minimal if any” income from these funds for at least the remainder of 2009.

The research house made the comment in its qualitative assessment of 15 global listed property strategies, which was released yesterday.

While Morningstar said currency hedging was a “prudent approach” and that it removes the exchange rate risk that results from investing outside of Australia, it noted the marked depreciation of the Australian dollar against all major currencies as a result of the global volatility.

“The result of the adverse currency movements in 2008 and the costs of the hedging is that most global property strategies were unable to make their regular distribution.”

Morningstar said none of the fund managers reviewed were able to provide an estimate of when distributions would return to normal.

Morningstar said with capital markets remaining tight throughout 2009, “fund managers will continue to encounter strong headwinds” in conditions where global property markets were down approximately 50 per cent in the past year and more than 25 per cent over the three years to March 31, 2009.

In its report, Morningstar also considered risk, saying the financial crisis has been “a rude reminder about the pricing of risk in this sector" and that the property asset class “struggled to diversify away risk in a multi-asset portfolio”.

“Global listed property now faces the arduous task of re-establishing investor confidence,” Morningstar said, adding that global property investment needs to “return to basics”.

The pressure is also on real estate valuations, Morningstar noted in its wrap-up.

“Softening economic conditions are exerting pressure on real estate valuations, which will remain while global credit market certainties persist.”

Morningstar said now is “an opportune time for the best fund managers to continue building solid global property offerings, and restore investors’ faith in this asset class”.

Morningstar added that global listed property still has a role in a well-diversified portfolio.

“Many REITs [real estate investment trusts] are now trading at substantial discounts to net tangible assets. While there continues to be downwards pressure on the underlying values, the current environment will provide great long-term opportunities for the skilled property investor,” the research house noted.

“As the sector returns to its roots … investors will be returning to the more simple and transparent structures of the sector’s earlier days, rather than entering a brave new world.”

Morningstar said investors in Australia should be taking a global (including Australia) approach to listed property investment.

Morningstar said that while investors get substantial exposure to global property assets through Australian REITs, they were better off utilising the resources of global property fund managers in a position to select the best ideas globally.

“The Australian REIT sector is relatively small by global standards and highly concentrated in a handful of stocks, which provides a very limited opportunity set.”

As a result of the assessment, Morningstar upgraded two strategies, including a move for ING from ‘recommended’ to ‘highly recommended’, and downgraded one strategy, EQT/SG Hiscock/LaSalle. The research house also introduced two new strategies and ceased coverage of another.