Listed property investors favouring global over local
Interest is growing in global listed property as direct property proves increasingly fraught for Australian investors, according to Morningstar.
Interest is growing in global listed property as direct property proves increasingly fraught for Australian investors, according to Morningstar.
Within listed property, investors are selecting global rather than Australian options, and favouring either indices or fully active funds over those in the middle ground.
Australian property was the favoured real asset exposure for fund investors before the global financial crisis. However, A-REIT fund exposure plunged in 2008.
It has since rallied but in recent years fund investors have allocated substantially more to global property and especially global infrastructure, as the below chart shows.
Funds under management for Australian real assets
Source: Morningstar DirectCloud, Australia Funds ex ETF, Exclude Obsolete Funds.
Within this context, the relevance of Australian real estate investment trusts is waning, according to Morningstar's Listed Property and Global Infrastructure Sector Wrap for September 2018.
"Many fund managers in this space are focusing their marketing effort on global property and infrastructure, with A-REITs an afterthought," say the report authors Alex Prineas and Sarah Fox.
This is also reflected in the actions of some A-REIT portfolio managers, who are increasingly searching for opportunities outside the local index.
There are examples among funds that invest in large-cap infrastructure and property stocks, along with those focusing on small caps and even micro caps. Prineas and Fox point to Cromwell Phoenix Property Securities 16260 within the former category, and Zurich (Renaissance) Investments Australian Property Securities 5396 within the latter. Ironbark Paladin Property Securities 5050 cuts across each of the above areas.
"This has worked well for managers that have the skills and knowledge to do it, and where managers have been careful to avoid adding too much risk.
"But we are circumspect about formerly benchmark-minded managers who have recently strayed into unfamiliar territory, but haven’t yet proved themselves," say Prineas and Fox.
Funds must lift their game
Morningstar's ratings of funds within the A-REIT space reflect these concerns, as lower cost index funds and well-regarded – and therefore higher cost – active managers scoop the majority of the higher medal ratings.
"We think A-REIT fund flows will mirror the bifurcation in our ratings. Managers who cannot demonstrate an edge need to up their game, or else they will see a decline in their relevance and assets under management," says Prineas and Fox.
Some A-REIT managers are boosting their "off-benchmark forays" further still, or even developing new funds to diversify away from A-REITs altogether – Legg Mason Martin Currie Real Income 19026 is one such example.
"This strategy, launched in 2010, encompasses Australian listed property, utilities, and infrastructure stocks, and in 2018 Morningstar added the vehicle to our research coverage with a neutral rating," say Prineas and Fox.
Martin Currie also launched an ETF version of this product earlier this year, in partnership with BetaShares: the BetaShares Legg Mason Real Income Fund RINC.
Several other managers are considering similar moves, by either tweaking existing A-REIT strategies or launching new products.
This is driven by a combination of more investor dollars flowing into global infrastructure and global property funds, and the relatively narrow menu of home-grown offerings available to Australian investors.
The report indicates there are only 19 property trusts in the S&P/ASX 200 A-REIT Index, and only 31 names in the S&P/ASX 300 A-REIT Index – the latter also includes small caps.
"Though there was a flurry of small-cap property trust listings over the past few years that widened the investment options for fund managers, there has been consolidation at the top end," say Prineas and Fox.
Local examples include the mergers of retailer players Federation and Novion; office giants Dexus (ASX: DXS) and GPT Group (ASX: GPT); and most recently, Westfield partnering with Europe's Unibail Rodamco to form Unibail-Rodamco-Westfield (ASX: URW). These have further reduced the investible universe for domestically-focused investors.
Why global property appeals
"In global property, we like index funds but not quite as much as we do in the A-REIT space," say Prineas and Fox.
They find most global property index funds appealing because of their diversification, low cost, and low portfolio turnover - and global infrastructure ETFs and index funds "have seen only modest asset flows so far".
Examples here include VanEck Vectors FTSE Global Infrastructure (Hedged) ETF IFRA and Vanguard Global Infrastructure Index Hedged 16242.
The lack of consensus about which benchmark is most relevant for global infrastructure is a key challenge for index managers.
"This is part of the driver for our highest ratings in infrastructure being reserved for active managers, but only those that have a clear and rational strategy, and the skills to navigate an undefined investment universe," say Prineas and Fox.
"In fact, we’ve seen a bevy of new managers launching active infrastructure funds, including Pinnacle BNY Mellon Global Infrastructure Yield and an upcoming launch from Ausbil, which is building an infrastructure team."
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Glenn Freeman is senior editor for Morningstar, based in Sydney.
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