Morningstar wraps up research on Australian and global listed property strategies

Morningstar has released its Sector Wrap-Up for Australian and global listed property funds and ETFs, covering 27 individual strategies (18 Australian and nine global). Morningstar does not charge or accept payment from fund managers to participate qualitative research reviews.

Key findings

• Funds that achieve Morningstar Analyst Ratings™ of Gold, Silver or Bronze are designated Morningstar Medallists. Four of the 18 Australian listed property strategies we assessed attained the highest-possible Analyst Rating of Gold – BlackRock Indexed Australian Listed Property, BT Property Investment, Vanguard Australian Property Securities Index, and Vanguard Australian Property Securities Index ETF. UBS Clarion Global Property Securities was the only global listed property strategy to receive an Analyst Rating of Gold. A further four Australian and one global strategy were designated Silver.
• AMP Capital Global Property Securities was initially upgraded from Bronze to Silver and then subsequently downgraded back to Bronze following staff departures in April 2014. We initiated coverage of SPDR Dow Jones Global Real Estate ETF at Neutral.
• Passive strategies have historically been the preferred vehicle for AREIT exposure. The post-GFC period has seen active managers strengthen their case for consideration. They have benefitted from improving fundamentals and an increase in sector depth as a result of IPO activity. Additionally, active strategies have tended to be managed by small, focused, and experienced investment teams. The question remains however whether this is an active shift or something more cyclical.
• REITs continue to offer an attractive way to get a reasonable yield, with the prospect of accompanying growth. Leverage has generally come down to acceptable levels, payout ratios are more sustainable, and the percentage of revenue derived from offshore and development-related activity has decreased meaningfully. This relative purity bolsters the number of investible options. The AREIT sector is also expanding into areas such as self-storage where previously there was no exposure. Despite some potential short-term headwinds, REITs continue to make a case for portfolio inclusion.
• The undeniable concentration of AREITs means most strategies offer similar exposures. It also means the best active managers typically outperform by just a few percentage points over the long term. As a result, there’s good reason to choose a relatively cheap strategy that alleviates the need to monitor an active manager and their reaction to the cycle’s progression.
• The uncertain direction of future interest rate movements has the potential to dampen activity in the sector. REITs are sensitive to yields and have shown they’re susceptible to the risk of rates rising quickly, as was the case when QE tapering was first signalled in mid-2013.

Click here for a full copy of the report.