(February-2002) Still paving the way?

The terrorist attacks in New York on September 11 last year were a tragic precursor to strong investment activity by institutional investors in both the listed and unlisted property sectors. The fallout on the global financial markets, which sent equity returns into a tailspin, has been driving a resurgence in property across the board as a defensive asset class.

InTech Financial Services says property securities were the best performing asset class in 2001, benefiting from a downward trend in interest rates over the year. The S&P/ASX 200 Property Accumulation Index rose by 14.6 per cent, while InTech estimates that unlisted property returned 9.1 per cent.

According to UBS Warburg’s Quarterly Real Estate Review, the shining returns from listed property trusts (LPTs) can be attributed to “persistent fears of a global economic slowdown and US recession”.

The report reveals a reversal of property’s outperformance over equities in November, however, which could signal a fluidity in investment markets throughout this year. It attributes this change to “positive US economic data, growing confidence in the war in Afghanistan, and investors looking over the economic trough towards a recovery this year”.

The local property market was characterised by a “sharp fall” in tenant demand last year, according to Goran Ujdur, Deutsche Asset Management’s head of property research and investment.

“After strong tenant take-up of space in 2000, demand came off in 2001 in the office, industrial and retail sectors. There was, however, very little overbuilding, which kept overall vacancy rates quite low and allowed fundamentals to remain favourable,” he says.

On the investment side, Ujdur says there was no let up in a chronic shortage of appropriate-grade stock for funds to acquire. “This kept property values up during the year, sustaining investment yields, even though tenant demand eased.”

He adds that the lack of stock is unlikely to ease soon.

“The banks are now very conscious of pre-commitment levels, which is one reason there wasn’t much overbuilding last year. Future additional supply will be controlled by the level of pre-commitment, and in the current climate of weak tenant demand, the level of development activity this year is also likely to be limited.”

Grant Hodgetts, Macquarie Bank’s head of equity raising, predicts that property will continue to perform strongly this year relative to other asset classes.

“There’s a reasonable degree of consensus in the wholesale marketplace that LPTs and direct investment, both pooled unlisted wholesale money and directly owned property, will receive increasing support,” he says.

Hodgetts believes that LPTs will return about 10 per cent for 2002, down on the highs of the past two years but still representing a premium on an investment in the equities and fixed interest markets.

“Unlisted wholesale and direct investments will also realise a return of about 10 per cent during this year,” Hodgetts says.

The sleeper in this scenario, he says, is the performance of enhanced property as an unlisted alternative asset class. He predicts that this class will receive the greatest support in 2002 in terms of a relative increase in investable dollars.

“A myriad of development-based pooled funds have been launched for wholesale property investors over the past two years, offering returns as high as 20 per cent plus,” he says.

“These will attract increasing inflows this year, as they are the sole property element in a slowing equities market that will enable super fund trustees to enhance returns and maintain their credit ratings of the past five years.”

Adrian Harrington, vice-president at Deutsche Asset Management, says: “Money has been flying into LPTs from super funds and wholesale investors in the past 12 months, but this will slow this year as the equities market returns to a more cyclical focus and some investors switch back into growth stocks.”

Harrington also predicts that LPTs will “generate a return of about 10 per cent for the year, comprising a running yield of 7.5 per cent and 2-3 per cent capital growth — which will be more in line with returns from the equity markets”.

He says LPTs stand to benefit during the year from an ongoing trend by large super funds towards maintaining and, in some cases, even increasing their allocation to property. Many super funds will combine both direct and listed property trusts, while others will move away from direct property into LPTs, driven by the quality of the assets in the LPT sector and their liquidity benefits.

“They will also benefit from a growing trend by small to medium-sized corporate super funds to roll into master trusts. Generally, these trusts offer investors exposure only to listed property,” he says.

Another trend, according to Harrington, will be a move into offshore property investment (see below), while healthcare and retirement village property assets will also receive more investor attention.

“The latter trend is due to the Government looking to the private sector to help fund the development of these assets, and also a result of companies looking to securitise non-core assets.”

Harrington says this ongoing “emphasis of balance sheet management” will intensify this year, offering third-party investment opportunities, he says.

“There’s a growing recognition by local companies that owning large non-core assets is an inefficient use of their capital, and they’re looking to securitise these in some way.”

Ujdur says there’s a growing awareness of the value of direct property in a balanced portfolio due to the turbulence in the broader equity markets.

“This could lead to an increase in the proportion of direct relative to listed property during the year, and beyond. Currently, the combined allocation is between 8 per cent and 10 per cent, with direct at 2.5 per cent or 3 per cent.”

Ujdur also sees a “growing appetite” among investors for direct global products and for greater variety in unlisted wholesale products, both core and enhanced.

“Numerous development-based products have been launched recently to meet this appetite, offering enhanced exposure to high yielding direct property.”

He says there is also an emerging appetite for specific unlisted retail, office and industrial trusts, to add to the existing diversified products.

Paul Nielsen, property research analyst at Melbourne-based Lonsec Alternative Research Group, says unlisted wholesale trusts are currently receiving a higher allocation from investors looking to hedge a proportion of their portfolio in turbulent times.

Nielsen says the rapid securitisation of the Australian property market is, in turn, generating a growth in select unlisted products that are providing increased opportunities for wholesale investors to generate higher returns than the overall market.

Brett Johnson, managing director of the Sydney-based Quartile Property Network (which is currently marketing its new residential syndicate, Sydney Land), says demand for syndicates is growing among super funds. “Their attraction is to facilitate investments of smaller amounts into a wider range of direct property, making it easier for the funds to get diversity into the mix and therefore, a balance in their portfolio”.