Lonsec: Global listed property continues positive momentum

Leading Australian research house Lonsec today released its 2014/15 Global Property Securities Sector Review, highlighting strong diversification and returns benefits for investors and a broadening opportunity set across products.

Lonsec’s review of the global property securities sector encompassed 23 funds covering 21 global property securities funds and 2 Asian-focused global property securities funds.

The report noted that most managers – particularly those based in North America – continued to be generally upbeat on the prospects for the sector going forward.  Momentum has continued to build behind the ‘yield theme’ across nearly all global markets and this trend has helped drive strong returns to the global property securities sector.

Sam Morris, Lonsec’s Senior Investment Analyst, said improving economic conditions would see direct property markets continue to benefit over 2015.

“The direct property market will benefit from better economic conditions in terms of increasing rental rates, occupancy levels, investment demand and capital values,” Mr Morris said.

Product evolution prompts first top ratings

Mr Morris said the global listed property securities market was presenting a greater set of investment options with new product development taking place over the past year.

In terms of ratings, this year’s review resulted in more positive outcomes generally, with four upgrades and two downgrades.

The Presima Global Property Securities Concentrated Fund and Resolution Capital Global Property Securities Fund have been upgraded to ‘Highly Recommended’ – to become the only two funds in the peer group to hold Lonsec’s top rating.

“We’ve seen some positive steps in terms of product development with the creation of some more ‘benchmark unconstrained’ strategies,” Mr Morris said. “In recent years we’ve also seen a product evolution, highlighted by the recent creation of the EQT LaSalle Global Property Rich Trust, which aims to deliver a return profile more akin to direct property than traditional listed property benchmarks.”

Risk versus return

With interest rates at historical lows, a key question raised by many investors is the potential impact on the sector when rates eventually rise. Mr Morris said global property securities had actually done reasonably well in rising rate environments historically.

“One possible reason is that rate rises typically occur during strong periods of economic growth with high business confidence, which leads to increased leasing demand,” Mr Morris explained.

While Lonsec believes there is a strong case based on diversification to include global property securities within overall portfolios, investors should be aware of additional risks associated with the asset class – such as the high volatility profile and the equity market risk.

“Property securities tend to behave more like bonds in stable markets but become more like equity in periods of high volatility and crisis. Thus it may be considered preferable for investors to utilise more defensive global property securities funds in their overall portfolios,” Mr Morris said.

“We also don’t believe investors should be relying upon global property securities funds as a source of income in an overall portfolio context – particularly those with currency hedging overlays.

“The key to investment selection in the global property securities sector is to identify funds managed by high quality investment teams and investment process, but with sufficient levels of active management. In upgrading the Presima and Resolution Capital funds, Lonsec believes it has found two such strategies.”

Other key findings of the report include:

• • Global listed property delivered a total return of 28.4% over 2014, to outperform global equities by 15.8%.

• • The US REIT market has significantly outperformed the broader global property securities market over 2014.  By contrast, Asia, which was weighed down heavily by Japan in 2014, delivered the weakest returns in global property securities markets.

• • The largest gains across the market were in the Residential, Hotel and Healthcare sectors.