The REIT stuff: global property is hot but investors need to keep cool

Global property funds have mushroomed in the past two years and research houses have devoted increasing resources to analysing the sector, with Lonsec the latest to provide an expanded review.

Does global property justify the interest? Retail research house Lonsec said last week that the firm believed the global real estate securities sector “presents a unique opportunity for informed Australian investors who have participated in the maturation of the domestic property trust market”. Australian listed property trusts (LPTs) have outperformed all other asset classes in most periods during the past 10 years and it is natural for investors to be drawn to look at global funds – real estate investment trusts (REITs) – for possibly similar outperformance over the next 10 years. Australian LPTs have matured, for sure, with a heavy concentration of market capitalisation among the largest (65 per cent by the top five). Funds managers in the space have similarly matured, with specialist firms and specialist units among the big firms. As Lonsec says: “Australian investors’ appetite for property, combined with their unparalleled experience and success in real estate securities investment, indicates they should be at the forefront of the evolution of this emerging asset class.” The Australian LPTs have diversified their assets offshore already, however, most of the new investments have been in the US, where the REIT market is already mature. Furthermore, Lonsec, quoting separate reports by investment banks Citigroup and UBS, says that most of the growth in future years will come from Asia and Europe – the last to securitise property. Australian and US trusts look overvalued by comparison. Investors should also be aware that international REITs may look very different to their Australian counterparts. US REITs, for instance, do not have as much exposure to commercial or office property, and have much more in residential and hotel properties. It could be argued that neither residential, at this stage of the market cycle, nor the notoriously volatile hotel market, make for recommended investments for the traditional Australian retail investor in LPTs. On the other hand, Lonsec points out three main advantages of global REITs: • Increased investment opportunity set – global real estate universe offers investors diversification, income and value; • Disparity between real estate cycles of different countries; • Increased securitisation – developing markets in a capital formation stage present opportunities due to inefficiencies associated with a lack of public market research. Lonsec recommends a weighting of 50 per cent of listed property to global property for ‘high growth’ investors or 30 per cent for ‘growth’ investors. The researcher rated nine global property products in its latest report, with two being given ‘highly recommended’ status – ING’s Global Property Securities Fund and the Deutsche RREEF Global (ex-Australia) Property Securities Fund.