Property highly volatile

The property sector has seen a 33 per cent fall in funds under management (FUM) due to volatile market conditions, according to the Lonsec’s 2008 Australian Property Securities Fund Sector Review.

The fall was a result of the decline in the listed property sector as a whole coupled with nervous investors switching to ‘less volatile’ direct property funds and cash.

Lonsec said the bad news was likely to continue in the short to medium term.

“2008 has seen the Australian Real Estate Investment Trust (REIT) sector severely affected by the credit crisis. Over the six months to June 2008, the S&P/ASX 200 A-REIT Accumulation Index has returned -30.58 per cent, which is well below its 10-year average return of 9.3 per cent per annum.”

The 2008 property securities review also found that the Australian property sector was highly concentrated with its largest stock, the Westfield Group representing almost 40 per cent of the S&P/ASX A-REIT Index.

Given this, Lonsec found all funds were significantly invested in the stock, with each fund holding an average of 28.2 per cent of its portfolio in the Westfield Group.

Lonsec noted that this concentration not only created diversification issues but also “poses the question of whether A-REIT fund managers should be charging an active fee over their entire portfolio. Most of the A-REIT funds in this year’s review are at least one-third passively invested in Westfield regardless of whether they believe it is over or undervalued.”