(March-2003) Managers warming to global property

There’s always a new investment strategy or sub-class vying for wholesale investors’ money. This time around it’s global property attracting attention because of the saturation of the domestic institutional investment grade property market.

Global property is certainly raising eyebrows, but according to international special opportunities portfolio manager at Principal Global Investors, Stuart Stuckey, few wallets are being opened.

“There is a genuine acknowledgement by super funds that they should have an exposure to international real estate, but it’s a new and emerging asset class and it takes time for trustees to become comfortable with it,” he says.

“We’ve been talking a lot with clients and asset consultants about global property securities and I think there’s a lot of interest in global real estate, but I don’t think they’re ready to invest yet.”

According to Colonial First State head of property securities Stephen Hayes, trustees looking to allocate more to property to maintain the composition of their portfolios as their fund grows may have to consider going offshore, as “70 per cent of all investment grade property in Australia has already been securitised”.

Nonetheless, Mercer Investment Consulting head of property research Nicholas Kelly says investors are too preoccupied with their overseas share portfolios to focus on global property. “To date, clients have displayed minimal interest in offshore property and have been more concerned with their investments in offshore equities,” he says.

Interestingly, however, Towers Perrin director of asset consulting services Paul Laband says funds, whether they know it or not, are already likely to have some exposure to international property anyway, sometimes through listed property trusts (LPTs).

“There’s very little interest in LPTs overseas as funds are likely to have a certain amount of exposure to these through any international equities that they may invest in, as LPTs are included in overseas indices. Particularly in countries such as Hong Kong, where LPTs are a significant part of the domestic index,” he says.

Stuckey notes that in 1996, all Australian LPT assets were invested in domestic securities, but the figure now stands at 71 per cent, with 29 per cent invested globally.

Mercer recently surveyed a range of Australian LPT managers and found around 25 per cent of the underlying assets within domestic LPTs are currently invested offshore, says Kelly, who forecasts that this figure might even rise to half the Australian LPT market in 10 years time.

Laband says the limited interest that exists today in global property tends to be in overseas direct property. This class, however, is less likely to be influenced by the same factors affecting the performance of other investments within a given portfolio.

“Returns from direct property are less correlated with broader economic performance as they are more locally specific, which provides investors with a certain degree of diversification,” he says.

Late last year, AMP Henderson Global Investors launched its Global Property Securities Fund, an unlisted wholesale fund investing in mainly listed property securities in Australia, the US, Europe and the evolving REIT (real estate investment trust) market in Asia. At the same time, Colonial First State Property launched its International Opportunistic Real Estate Fund (IOREF), which is a direct property fund-of-funds investing through managers in the UK, US and Europe.

BT Financial Group head of asset accumulation Rob Coombe says his company also offers clients access to international property via a deal struck with global property manager, AEW Capital Management. He adds, however, that interest in the offering has been slow to manifest.

“It’s probably an emerging product, as we haven’t traditionally seen a lot of appetite for global property, but there seems to be an increasing demand for that type of product … Certainly, it can act as a diversifier against equity risk,” he says.

According to Hayes, a possible reason for the hesitation shown by investors is the inherent risks of going offshore. “Investors are faced with political risk, currency risk and the taxation policies of the countries invested in,” he says.

Stuckey adds that benchmarks have also been an issue, given the infancy of the asset class.

“Like all emerging asset classes, benchmarks have been a problem, and up until recently, there hadn’t been one,” he says.

Stuckey says managers can now choose between two: the Global Property Index (GPI) or the combined European/North American index, the EPRA/NAREIT.

Hayes argues that any push for funds to allocate a proportion of assets to global property has to come from independent sources.

“It has to be institution driven, that is, the asset consultants and the researchers have to be the drivers rather than the fund managers... To date, they’ve been extremely slow in responding. I don’t think any of the Australian researchers or asset consultants have any experience really in global property, but these people are proactive and if they see an opportunity there, over time they are likely to respond,” he says.

Kelly says Mercer plans to investigate whether there will be a need for Australian investors to invest directly offshore because it predicts that a large proportion of the local market will eventually have offshore property exposure anyway. Personally, however, Kelly expects the answer to be ‘yes’ given the larger global universe.

“We expect that for diversification purposes we will consider investing in both Australia and offshore property in due course. In addition to the diversification benefits, some offshore managers are adding substantial excess returns. There are only 30 odd trusts listed in the Australian market, compared to 150 in the NAREIT index in the US,” he says.

“Just last week we were reviewing a US REIT manager that has outperformed its benchmark by 13 per cent in 2002 — that’s unheard of in the Australian market.”