Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Listed property investors favouring global over local

Glenn Freeman  |  19 Sep 2018Text size  Decrease  Increase  |  
Email to Friend

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

AREIT listed property

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."

 

More from Morningstar

Top 10 articles of last week

Global Market Report - 10 September

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

Glenn Freeman is senior editor for Morningstar, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend