There’s always a flight to quality when there are stresses in the market and at this point in the cycle institutional investors should focus on the quality of market and the quality of real estate.

That’s the view of Ann Cole, a co-portfolio manager on JP Morgan Asset Management’s real estate team, which manages about US$60 billion globally.

Despite successful returns in Australian property since the financial crisis, investors are now looking to diversify into domestic-heavy retail, as well as commercial and industrial property allocations into international markets.

Speaking ahead of the AIST Superannuation Investment Conference to be held in Hobart on September 3-5, the US portfolio manager will explain why she is a staunch advocate of US core real estate.

According to Cole, the US market is well positioned today. “The US economy has been in an elongated economic cycle,” the fund manager adds. “While we are at the mature part of the cycle, and growth is more muted than it was a year ago, investors should be looking for quality real estate that can generate an income yield and a slow growth market will continue to provide that.”

The added benefit, she goes on to say, is that while we have seen rates decline, that is providing “increased liquidity into the US real estate market.”

Cole is not suggesting a recession is imminent, but she accepts there are some uncertainties because of the on-going trade war between US and China.

But the longer the cycle, she adds, the more important it is to understand the risk profile of investor portfolios. “We are advising investors that the longer they are in the cycle, the more they should be reducing risk and ensuring their portfolio can endure whatever soft patch the market might bring.”

“In times of stress, you want to ensure you have high credit quality real estate back- stopping your rent. It’s similar to a bond. You want to understand the underlying credit quality behind that collateral.”

Quality real estate has typically retained its value in a downturn and provided more durable income” she argues, adding that it rebounds faster as the market moves into recovery.

“Over a cycle, investors who invest in higher quality level of real-estate will generate higher levels of return and less volatility.”

At the conference, Cole will identify interesting opportunities in Europe and Asia but will push the line that the majority of a fund’s global investment should be in the US because of its size, high level of transparency and liquidity which further reduces investor risk.

Conceding that all institutional investors are very home-centric when it comes to property investments, she says Aussie investors should diversify into markets that have a lower level of correlation with their home country.

“That combination provides a better risk adjusted return for their overall portfolio,” she adds.

Importantly, Cole continues, the US economic growth is very driven by domestic consumption and compared to many other markets. Only one third of the US economy is driven by exports. That further solidifies that diversification and provides a lower level of correlation relative to the Australian market and broadly across other international markets.

The portfolio manager says between 40-60 per cent of investors’ property allocation should be in the US with between 20-40 per cent in Europe and around 10-30 per cent in Asia Pacific.

 

 

 

 

 

Elizabeth Fry has been a financial journalist for more than 25 years and has written for a number of publications, including CFO, The Financial Times and The Australian Financial Review.
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