A real-estate investment that still pays off
Wednesday, 26 September 2007
Miki Tanikawa
Believers in global equities have been rewarded with 16 percent annual returns since 2004. Believers in a different asset class - real estate - received even bigger prizes.
Take the tax-efficient real estate vehicles called real estate investment trusts, which proliferated globally in the last several years. They have returned 24.2 percent annually for the last three years and 25.3 percent over the last five years, according to the National Association of Real Estate Investment Trusts, an industry group in Washington.
Performance in Europe and Asia was particularly strong, with the three-year average annual return coming to 27.3 percent and 30.1 percent, respectively, in dollar terms.
But some investors think that for the $800 billion global REIT market, the tipping point may be at hand. Share values have been bid up in some markets to many multiples of the underlying asset value, leading some big institutional investors to cut back on their REIT holdings. For those who remain in the market, as for equity investors generally, quality is key.
REITs are listed real estate funds that buy commercial properties such as office buildings, shopping malls and industrial complexes. They are required to pay out most of their earnings to investors and are exempt from corporate taxation.
Until earlier this decade, such investment vehicles were found only in the United States, Australia and the Netherlands. But driven by low interest rates and investor demand for high yields and cash flow, REIT-type markets have been created over the past decade in Singapore, Japan, France and, most recently, Britain. Other countries have jumped in as they discovered the benefits of REITs to an aging investor population hungry for steady cash income. According to Property Funds Intelligence, a property investment research firm in London, there are now over 68 funds specializing in listed real estate shares globally, up from a handful in 2002.
Lately the trusts have shown much the same volatility as world equity markets generally. The jump in global interest rates in late May sent REIT shares tumbling, and sent a scare through investors. REIT shares dropped 7.73 percent worldwide in June alone. In July they slid a further 5.11 percent.
As the credit crisis hit in August, sparked by subprime lending problems in the United States, investors jumped back into underpriced REIT shares, pushing prices up 2.59 percent by the end of the month.
"There was the initial severe reaction when all shares, including REITs, were down due to overall weakness in stock market sentiment and receding liquidity," said Wen Khai Meng, chief executive of Capitaland Commercial, which runs several REITs including Capitamall Trust, the largest REIT listed in Singapore.
Wen is still bullish on REITs, and on markets generally. "Funds flow into Asia has resumed in September, and investors still have confidence in Asia and the REIT market," he said.
Other investors are less sanguine. "A lot of money came out into the sector over the last few years and ultimately pushed up prices a little too high," said Sam Lieber, founder and lead portfolio manager of Alpine Woods Capital, a global real estate investment manager in New York. "We thought the valuation was stretched, so we pulled back and looked for other areas."
Brett Ward, European chief executive at AMP Capital Redding Investors, an international real estate investment group based in London, said he was worried about rising interest rates, which hurt real estate development by making it more expensive to borrow for construction or renovation. "The market is in various stages of moving from accommodative to either neutral or restrictive monetary policy," he said. "The interest rate cycle is turning against the market and to that extent, I think, in many markets you have a negative spread between property yields and benchmark interest rates, which has been a source of insome cases significant concern."
Lieber said property yields had comfortably stood around 6 to 7 percent five years ago, which has since shrunk to 3.5 percent. "These stocks made a lot of money for a lot of people because of capital appreciation," he said. "Money kept flowing in and now we are seeing a pullback. It really became money chasing performance."
Analysts pointed out, however, that investors should not overlook the quality of the assets underlying the REIT shares, which have tended to spike across the board. Ward said that in the direct, transactional real estate market, re-pricing has occurred only at the lower quality end of the spectrum. "Some of the secondary assets began to diverge from prime quality assets," he said. "At the prime level, transactions we have seen in many markets haven't provided any indication of repricing. You compare that to the listed market, and the willingness to reprice listed real estate companies seems preemptive."
Flight to quality might seem a reasonable strategy under such circumstances. "Large investors usually buy major trophy investment assets like shopping centers, office towers, and industrial parks," said John Snowden, head of listed property securities at Colonial First State Global Asset Management. "Provided that tenants don't go broke, you can see high levels of confidence of both cash flow and income will continue. If you put your money in c-grade office development, that is a risky proposition in many ways because often these types of property are going to be hit hard in a market downturn."
Another factor likely to bolster REIT shares is that real estate tends not to be correlated with equities. Investors worldwide bought into the story that investing in real estate internationally brings diversification benefits in a way that stocks don't: real estate is a highly localized business and correlation among markets in different countries are very low. Thus, investing in them globally reduces risks, lowering volatility and improving returns.
"If you buy in Finland, and you can buy Nokia. But if you are getting Nokia you are getting global demand for their phones and networks," Lieber said. "Whereas if you buy Citycon" - a leading real estate company based in Helsinki - "you are getting local demand for shopping centers. There is a local consumption pattern that filters into rental demand."
Even the globalization of real estate investing has not had a generalized effect on correlation, analysts said. Correlation among different markets became stronger for certain, said Bard of AMP Capital, especially with the global debt market playing a greater role in listed real estate. But the "diversification argument still holds up irrespective of the performance that people have been getting recently," he said. "The synchronization of returns between different markets has been moderate to low, and certainly it still has not reached anywhere near the levels of global equities or global bonds."
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Herald Tribune
Believers in global equities have been rewarded with 16 percent annual returns since 2004. Believers in a different asset class - real estate - received even bigger prizes.
Take the tax-efficient real estate vehicles called real estate investment trusts, which proliferated globally in the last several years. They have returned 24.2 percent annually for the last three years and 25.3 percent over the last five years, according to the National Association of Real Estate Investment Trusts, an industry group in Washington.
Performance in Europe and Asia was particularly strong, with the three-year average annual return coming to 27.3 percent and 30.1 percent, respectively, in dollar terms.
But some investors think that for the $800 billion global REIT market, the tipping point may be at hand. Share values have been bid up in some markets to many multiples of the underlying asset value, leading some big institutional investors to cut back on their REIT holdings. For those who remain in the market, as for equity investors generally, quality is key.
REITs are listed real estate funds that buy commercial properties such as office buildings, shopping malls and industrial complexes. They are required to pay out most of their earnings to investors and are exempt from corporate taxation.
Until earlier this decade, such investment vehicles were found only in the United States, Australia and the Netherlands. But driven by low interest rates and investor demand for high yields and cash flow, REIT-type markets have been created over the past decade in Singapore, Japan, France and, most recently, Britain. Other countries have jumped in as they discovered the benefits of REITs to an aging investor population hungry for steady cash income. According to Property Funds Intelligence, a property investment research firm in London, there are now over 68 funds specializing in listed real estate shares globally, up from a handful in 2002.
Lately the trusts have shown much the same volatility as world equity markets generally. The jump in global interest rates in late May sent REIT shares tumbling, and sent a scare through investors. REIT shares dropped 7.73 percent worldwide in June alone. In July they slid a further 5.11 percent.
As the credit crisis hit in August, sparked by subprime lending problems in the United States, investors jumped back into underpriced REIT shares, pushing prices up 2.59 percent by the end of the month.
"There was the initial severe reaction when all shares, including REITs, were down due to overall weakness in stock market sentiment and receding liquidity," said Wen Khai Meng, chief executive of Capitaland Commercial, which runs several REITs including Capitamall Trust, the largest REIT listed in Singapore.
Wen is still bullish on REITs, and on markets generally. "Funds flow into Asia has resumed in September, and investors still have confidence in Asia and the REIT market," he said.
Other investors are less sanguine. "A lot of money came out into the sector over the last few years and ultimately pushed up prices a little too high," said Sam Lieber, founder and lead portfolio manager of Alpine Woods Capital, a global real estate investment manager in New York. "We thought the valuation was stretched, so we pulled back and looked for other areas."
Brett Ward, European chief executive at AMP Capital Redding Investors, an international real estate investment group based in London, said he was worried about rising interest rates, which hurt real estate development by making it more expensive to borrow for construction or renovation. "The market is in various stages of moving from accommodative to either neutral or restrictive monetary policy," he said. "The interest rate cycle is turning against the market and to that extent, I think, in many markets you have a negative spread between property yields and benchmark interest rates, which has been a source of insome cases significant concern."
Lieber said property yields had comfortably stood around 6 to 7 percent five years ago, which has since shrunk to 3.5 percent. "These stocks made a lot of money for a lot of people because of capital appreciation," he said. "Money kept flowing in and now we are seeing a pullback. It really became money chasing performance."
Analysts pointed out, however, that investors should not overlook the quality of the assets underlying the REIT shares, which have tended to spike across the board. Ward said that in the direct, transactional real estate market, re-pricing has occurred only at the lower quality end of the spectrum. "Some of the secondary assets began to diverge from prime quality assets," he said. "At the prime level, transactions we have seen in many markets haven't provided any indication of repricing. You compare that to the listed market, and the willingness to reprice listed real estate companies seems preemptive."
Flight to quality might seem a reasonable strategy under such circumstances. "Large investors usually buy major trophy investment assets like shopping centers, office towers, and industrial parks," said John Snowden, head of listed property securities at Colonial First State Global Asset Management. "Provided that tenants don't go broke, you can see high levels of confidence of both cash flow and income will continue. If you put your money in c-grade office development, that is a risky proposition in many ways because often these types of property are going to be hit hard in a market downturn."
Another factor likely to bolster REIT shares is that real estate tends not to be correlated with equities. Investors worldwide bought into the story that investing in real estate internationally brings diversification benefits in a way that stocks don't: real estate is a highly localized business and correlation among markets in different countries are very low. Thus, investing in them globally reduces risks, lowering volatility and improving returns.
"If you buy in Finland, and you can buy Nokia. But if you are getting Nokia you are getting global demand for their phones and networks," Lieber said. "Whereas if you buy Citycon" - a leading real estate company based in Helsinki - "you are getting local demand for shopping centers. There is a local consumption pattern that filters into rental demand."
Even the globalization of real estate investing has not had a generalized effect on correlation, analysts said. Correlation among different markets became stronger for certain, said Bard of AMP Capital, especially with the global debt market playing a greater role in listed real estate. But the "diversification argument still holds up irrespective of the performance that people have been getting recently," he said. "The synchronization of returns between different markets has been moderate to low, and certainly it still has not reached anywhere near the levels of global equities or global bonds."
.........................
Herald Tribune