Cash to flow back to trusts as investors look for yield

AN INCREASE in public floats and mergers and acquisitions activity will be a feature of the real estate investment trust sector in the medium term, according to Principal Real Estate Investors.

By InvestSMART · 15 May 2012

By InvestSMART ·
15 May 2012

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AN INCREASE in public floats and mergers and acquisitions activity will be a feature of the real estate investment trust sector in the medium term, according to Principal Real Estate Investors.

Kelly Rush, head of global property securities for Principal Real Estate Investors, based in Des Moines, Iowa and Alastair Gillespie, the firm's Singapore-based managing director for portfolio management, have forecast a flow of cash back to the indirect REIT sector by investors seeking out higher yields.

Mr Rush said US REITs' share prices were back at parity with net tangible asset values, making the sector more attractive for all investors.

Mr Gillespie said the same would occur in Australia, but only when that gap narrowed, which was happening at a slower pace than the US. "Asian investors are looking to more defensive markets to provide a lower beta investment," Mr Gillespie said.

"They are all looking at the US, London and Australia, both directly and indirectly through REITs. Japanese investors have been active buyers in London in the past year."

Mr Gillespie said another emerging trend was for fund managers to bundle these assets into their own REITs, such as the Singapore-based Ascendas which is preparing to float a new hospitality fund, seeded by the hotel assets it acquired from Mirvac.

He said developing markets such as Brazil will become more popular as cash flows to higher yielding greenfield developments. Westfield and the US retail landlord Simon Property Group have led the charge with large-scale projects.

Mr Rush said he had seen a general trend among his clients to switch to more global funds to diversify volatility and risk.

"US stocks have been strong performers in a relative sense but funds are now searching for yield, particularly in a low interest rate environment," Mr Rush said.

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Frequently Asked Questions about this Article…

Why are investors expected to push cash back into REITs and indirect property trusts?

According to Principal Real Estate Investors, investors are seeking higher yields, which is driving cash back into the indirect REIT sector. With low interest rates and a hunt for yield, public floats and mergers and acquisitions activity in the real estate investment trust space are expected to increase.

Are US REITs attractive to everyday investors right now?

Principal Real Estate Investors says US REIT share prices have moved back toward parity with net tangible asset values, which makes the sector more attractive to investors who are looking for income and value in property securities.

Will Australian REITs see the same investor interest as US REITs?

Principal Real Estate Investors notes the same pattern could happen in Australia, but only when the valuation gap between prices and net tangible assets narrows. That narrowing has been happening more slowly in Australia than in the US.

How are Asian investors approaching global property markets?

The article says Asian investors are looking to more defensive markets to lower beta and risk. They are examining opportunities in the US, London and Australia, both directly and indirectly through REITs, and Japanese investors have been active buyers in London recently.

What does it mean when fund managers ‘bundle assets into their own REITs’?

Bundling means fund managers group property assets into a new REIT structure to float or list them. The article gives the example of Singapore-based Ascendas preparing to float a hospitality fund seeded with hotel assets it acquired from Mirvac.

Will developing markets like Brazil attract property investment?

Principal Real Estate Investors suggests developing markets such as Brazil will become more popular as cash flows to higher-yielding greenfield developments, with large-scale projects led by developers like Westfield and US retail landlord Simon Property Group.

How are investors managing volatility and risk in property securities?

Kelly Rush from Principal Real Estate Investors says clients have generally been switching to more global funds to diversify volatility and risk, while funds continue to search for yield in a low interest rate environment.

What market activity should everyday investors watch in the REIT sector?

Investors should watch for an increase in public floats, mergers and acquisitions, valuation gaps between share prices and net tangible assets, and fund managers creating new REITs from bundled assets — all signs the sector is responding to demand for yield.