How to invest in offshore property

27 Mar

St Vincent Kingtown - offshore propertyWHEN it was floated in November last year, Hong Kong’s first real estate investment trust – Link REIT – created a global sensation, attracting demand from offshore investors for $55 billion worth of shares.

The lucky few, including Australian fund managers, who received allocations in the world’s single largest property trust have enjoyed a richly rewarding experience.

Its share price has soared from an issue price of $HK10 to $HK17.85 at the end of trading on Friday.

These investors had a joy ride through being investors in global property securities (GPS) funds, a new asset class in Australia. These funds invest in global REITs – which are Listed Property Trusts.

Their fund managers – Colonial First State (CFS), AMP Capital Investors and SG Hiscock – are among the international institutions to become shareholders in Link REIT.

John Snowden, CFS’s head of property securities, says it is the performance of investments like the Link REIT that has contributed to the strong performance of CFS global securities funds.

According to research firm Morningstar, the best global property securities retail and wholesale funds hail from the CFS stable.

CFS Colliers Global Property, a retail fund, delivered a total return of 37.73 per cent and its wholesale fund 40.01 per cent in the 12 months to February 28. (Wholesale funds require a larger initial investment but fees are lower, resulting in higher returns.)

Snowden says the funds also invest in Tour Eiffel, a French diversified REIT, and American Tower, a US REIT specialising in power transmission assets.

Like Link REIT, they performed well last year.

“We are careful in selecting the right stocks,” he says. “There will be more opportunities as more REITs are listed on overseas exchanges.

“Some will provide good value and others will be expensive. We have to be careful in analysing the fundamentals of each stock.”

The most popular REIT stocks are Simon Property Group, a leading US shopping centre owner; Prologis, the leading US industrial property developer; Archstone Smith, the fourth largest US residential REIT; Boston Properties; and Starwood Hotels and Resorts.

Others include British Land and Land Securities (also British), Hong Kong Land and Nomura Real Estate Office Fund (Japan).

Morningstar’s data shows that all but one global property securities fund returned more than 30 per cent in the last 12 months, compared with 12.5 per cent from Australian LPTs.

Russell Investments head of property Asia-Pacific Sally Haskins says: “We had a tremendous year last year. Clearly, returns were extraordinary. Over the long term, however, we expect property returns to fall between equities and bonds.”

Russell International Property Securities Fund, with net assets of $504 million, returned 35.59 per cent in the past year.

And, since inception in 2002, the annualised return from the European component of AMP GPS vehicles, with $4.08 billion under management, is 30 per cent.

Until five years ago, says Andrew Parsons, managing director of Resolution Capital, there were significant tax hurdles, but these are being addressed, making offshore securities cost-effective.

Choice and opportunity has expanded greatly with the number of REITs in Europe and Asia expanding all the time.

Scott Crowe, global real estate strategist with UBS, expects global investment in listed real estate, estimated currently to be around US$500 billion, to continue to accelerate. He expects market capitalisation to double to US$1 trillion ($1.36 trillion) in the next five to seven years, driven by the proliferation of REIT markets international.

Although AMP Capital Investors led the way when it began investing institutional money in overseas stocks in 2002, the trend did not really take off until 2004.

Since then, 15 managers have begun offering products in Australia, now seen as the global spawning ground for GPS funds.

The magnet is Australia’s $800 billion superannuation savings pool. Melbourne asset consultant Ken Atchison estimates super funds invest in about $6-7 billion of these assets through mandates.

Retail investor issues

UNLIKE institutions, retail investors have been slow to embrace the new product.

Peter Morrissey, senior analyst with independent research firm Lonsec, says retail investors usually must approach financial advisers who invest in global property securities funds through “platforms” like master trusts and wrap accounts. Rashmi Mohrotra, head of retail services at Mercer Consulting, says financial planners understand the need to go overseas because Australian listed property trusts (LPTs) are overvalued.

“They often ask: is this a good time to invest overseas?” she says. “We caution them to go slowly.”

Retail funds take investments from $1000 (Russell International Property Securities, BT Global Property) to $25,000 (Deutsche Global – ex Australia – Property Securities fund).

Higher net worth investors with at least $100,000 to invest can choose a wholesale fund, which have lower management fees.

Fund managers charge ongoing annual management fee ranging from 0.85 to 1.8 per cent (See table).

A key point investors should understand is that global property securities are “total return plays as opposed to an income play with LPTs”, says Morrisey. That is, this is a capital growth rather than an income-focused investment.

Parsons says the yield from overseas REITs ranges from 4.5 to 5.5 per cent, versus 7 per cent for LPTs.

The trade-off for lower yield is better long-term capital growth prospects. Most GPS funds include Australian LPTs in the portfolio (around 10 per cent, according to benchmark indices).

If investors only want offshore REITs or companies, they should opt for “ex-Australia” trusts, like one offered by Deutsche Asset Management.

Diversity argument

THE key reason for going offshore is not to put all of one’s eggs in one basket. The risk of investing in Australian LPTs has increased. The market here is concentrated and risks have increased.

LPTS typically have 40 per cent of their assets located outside Australia. As Lonsec’s Morrissey notes, the top five LPTs now make up 70 per cent of our LPT index.

For every dollar invested in the Australian LPT index, 35c goes to one stock – Westfield – which makes up 35 per cent of the index. LPTs here have higher borrowings and some have moved into riskier activities like development.

LPTs are also considered over-valued and their returns have trended down from 32.2 per cent in 2004 to an expected 10 per cent this year.

Simon Ibbetson, investment consulting director at Standard & Poor’s, says local listed property assets may have reached their full valuation. Significantly, he is advising clients to switch out of LPTs to global securities. He says the global product has lower volatility than domestic LPTs.

“Replacing local property trusts with their global counterparts should both reduce the overall risk in the portfolio, while at the same time provide some upside in terms of better returns,” Ibbetson says.

Parsons says GPS trusts offer also offer access to good quality global real estate and management team overseas. “Australia does not have exclusivity on securitised real estate,” says Parsons, who is to launch Resolution’s first global property securities trust in the June quarter.

“Some of the world’s best companies are Prologis or Boston Property, based in the US or Rodamco, in the Netherlands.

“They have fantastic management platforms and underlying real estate,” Parsons says.

Martin Smith, ABN AMRO’s associate director of institutional sales, agrees that global securities offer geographical diversification.

He says residential or apartment REITs and healthcare REITs have traded well overseas.

Ibbetson says as an asset class, global property trusts are much more widely diversified than their local peers. “This diversity is across country, currency, asset manager, and property type.”

Patrick Sumner, head of property securities with Henderson Global Henderson, which looks after the AMP Capital Investors’ European investment, says GPS returns resemble “stable, bond-like income streams”.

Source: The Australian

Photo credit: rapidtravelchai via Visual hunt / CC BY

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