Based on the market equation, US listed REITs operating in residential housing have on the whole shown the ability to capitalise on stronger rental streams, notwithstanding the heavy declines in stock prices during the GFC. Logic would tell us that the opportunities for the long-sighted are definitely there. However, operating a residential REIT on your own turf is one thing; investing across borders in real estate is quite another.
When managing assets offshore, there are essentially two approaches. Firstly, a REIT (be it listed or unlisted) can enter into a strategic alliance or joint venture ( JV) with a local operator to undertake the asset management. This strategy tends to have the advantage of being cheaper to execute, at the risk of a lower level of control, depending on how the deal is structured. The second alternative is to set up a management company locally. While this is more intensive, it does theoretically have the advantage of giving a greater level of control over operations. Either way, the alignment of interests and structuring of incentives is essential in offshore operations, as is the cultural management aspect.
So the question is, which way are the Australian fund managers going? Based on the offerings to date, both the JV and offshore company approach are being utilised. But the key issue will be, will they work?
Successful management of cross-border real estate investment has a somewhat checkered history in Australia, even for global players. It often works while times are good but exposes flaws in times of stress and uncertainty, as the A-REIT sector has recently shown. While we think the managed fund approach is intrinsically better for retail investors than going it alone – unless they really know what they are doing – we question the management ability of some of the offerings out there in the absence of more detailed information as to how the offshore relationships will work in practice.
In summary, we think that the window of opportunity is wide open for Australian investors to take advantage of a unique set of circumstances to generate solid rental returns. However, while there is no doubt that opportunities abound in the US, investors must be wary. Despite falls in value that have been both deep and widespread, this should not be confused with an incipient re-rating of the market as a whole in the near or even medium term. Caution must be the order of the day. Cheap US housing is not foolproof; it is not a sure thing. It should be considered by those with a healthy regard for risk.
Dug Higgins is a senior investment analyst Zenith Investment Partners – www.zenithpartners.com.au
