Which global REIT?

Property consultant Ken Atchison of Atchison Consultants earlier this year received a multi-million mandate from a leading Australian investor: The challenge? Switch substantial funds out of locally listed Australian property trusts into global REITs (real estate investment trusts). How does a professional investor make such a decision? Atchison and his team spent many weeks reviewing the management expertise available in global REITs before setting on a short list of three fund managers: AMP, Cohen & Steers and Colonial First State). Below he discusses the key issues he assessed as part of the mandate and the three managers that made the final cut.

Global REITs are defined as an investment vehicle established for the benefit of a group of real estate investors. A REIT (real estate investment trust) is an unincorporated trust or association, managed by one or more trustees who hold title to the assets of the trust and control acquisitions and investments. Real estate investments commonly include office buildings, apartments, warehouses and shopping centres.

The global property universe encompasses property ownership through property companies and, increasingly, through REITs.

Four of the most commonly cited fundamental reasons for investing in real estate including global are:

• Portfolio diversification benefits in terms of volatility and return.
• Attractive and stable income returns.
• Competitive volatility-adjusted returns compared with stocks and bonds.
• A sufficiently large investible universe relative to stocks and bonds.

Accumulation of worldwide investment expertise by many financial institutions, the advancement of telecommunication technologies and the much improved availability and quality of information have combined to transform global real estate investing into a less costly, more transparent and substantially less risky undertaking. An example of the risk/return performance of Global REIT indices is as follows:

Source: UBS July 2007

Where Australia has about 34% of property assets in listed vehicles, currently only 7% of the global property universe is in listed vehicles but is growing rapidly. Cross-border REITs are increasing. Australian REITs have led this phenomenon.

After several years of strong performance, global REITs’ current performance has fallen sharply since the middle of 2007, exacerbated for unhedged Australian investors by the strengthening Australian dollar. In local currency terms, the UBS Global Investors index returned 20.3% pa over the five years to June 2007, but has returned minus 23.4% in the past 12 months.

The downturn in global REIT markets is evident from the falls in listed property market capitalisation in the major countries over the past year, as shown in Chart 2.

After a relatively stable first five months in 2008, the Global index fell by 10.7% in June, with all major regions suffering falls.

Aggressive action by the US Federal Reserve on interest rates, new lending programs and the bailout of Bear Stearns stabilised the listed property market in the US in the first quarter of this year. Asia, which had been the best performing region in 2007, capitulated in the fourth quarter of 2007 and performed badly in the first quarter of 2008, with Japan, Hong Kong and Australia all falling about 20% in local currency terms.

Europe was mixed, with positive returns in France offset by negative returns in Germany. Economic headwinds are likely to continue to impact property markets in both these countries. The UK was relatively flat in the first quarter of 2008, but experienced a 23.1% fall in the second.

Yields on listed property now exceed long-term bond yields in most markets, offering a positive outlook for investing.

There are a number of different investment structures employed to access the global listed property market and the benefits of geographic diversification and diversification opportunities by property type. These include:

• Geographic, where an investor will appoint managers by key regions.
• Global. This style is driven by a fundamental analytical approach and requires significant stock analysis across the entire global market. This is the more widely used structure in the market.
• Fund of Funds. This structure incorporates elements of the geographic or global fund structures above.

A global REIT mandate manager requires both property and securities knowledge in all countries. Decisions are required regarding relative valuation irrespective of the location of listing.

Examples of managers that provide global REIT investment capability include Cohen & Steers, AMP Capital Investors and Colonial First State, all of which use a global approach as their investment style.

Cohen & Steers

Cohen & Steers is an investment manager of equity portfolios, with a focus on global real estate securities. Cohen & Steers managed about $A31.2 billion in assets at March 31.

Cohen & Steers seeks to maximise total return with a balance of capital appreciation and current income by investing in portfolios of securities of real estate companies located around the world. It adheres to a disciplined integrated, research-intensive approach that is used to consistently value real estate securities of companies to construct portfolios against specified investment objectives.

As at March 31, the Cohen & Steers Global Listed Property Fund performance was negative 22.2% for the year vs the benchmark performance of negative 21.5%.

AMP Capital

AMP Capital Investors is an established participant in global REITs and has a global strategic alliance with Kim Redding & Associates in North America. The Kim Redding relationship remains significant, with over 50% of the benchmark represented by the US.

AMP Capital Investors’ investment philosophy is designed to manage the distinctions that exist between property investors, fund managers and developers around the world by leveraging local expertise. It perceives that performance of property securities is influenced by their relative attractiveness against both direct property and other parts of the equity market. AMP Capital Investors believes evaluation of both areas is necessary and multi-asset expertise is required.

As at May 2008, the AMP portfolio was negative 19.5% for one year; the benchmark performance was negative 19.8%. The portfolio performance for a cumulative two-year period as at May 2008 was 5.4% vs the benchmark at 4.6%.

Colonial First State

Colonial First State Global Asset Management (CFSGAM), a company in the Commonwealth Bank group, has an investment philosophy that states that owning listed property securities is a good substitute for holding property directly, allowing diversification over various types of properties and geographical areas. It believes that markets are inefficient and opportunities to add value exist by identifying incorrectly priced securities.

The portfolio investment universe is very broad, including developers and those in indices such as the MSCI World Real Estate Index, S&P/Citigroup BMI (World) Property Index, UBS Global Investors and GPR/LIFE global property index.

CFSGAM performance as at May 2008 was negative 21.2% for one year against negative 20.6% from the benchmark. The portfolio performance for a cumulative two-year period as at May 2008 was 6% vs the benchmark at 3.8%.