Global Reits – is now the right time?
Direct route headaches They say that home is where the heart is. To most of us as individual investors, our homes also make up a large part of our assets. Property has long been a recognised investment vehicle and its characteristics are familiar to us. However, as an investment opportunity, its attractions have in the past diminished somewhat because, until now, the only way to reach this market has been directly i.e. through buying bricks and mortar. Direct property investment can be a difficult option for investors as it is fairly illiquid, requires significant upfront capital and can provide ongoing management headaches.
New developments This year, regulations in the UK have permitted real estate investment trusts (Reits) for the first time. Reits provide an indirect investment route – i.e. via listed property securities. A Reit is a company that at least owns, but more often actively manages and develops a variety of real estate including hotels, offices, apartments (for rent), healthcare and industrial buildings. The company does not pay corporate level income tax but instead can pay out the majority of its income in dividends. Accordingly, the investor can enjoy the benefit of the dividends as well as any potential capital appreciation. Diversified, global and liquid Unlike direct property investing, there are no management or operating responsibilities with Reits and they can also offer daily liquidity and provide enhanced diversification benefits. Another challenge of direct investing is that it can be difficult to gain exposure to overseas markets. In contrast, Reits offer a simple way of investing in international property – and more markets are opening up year on year. In 1994, there were only four countries with listed Reits. Today, there are 18 countries with Reit structures in place and 12 under consideration. Since real estate is a highly localised business, with its own supply/demand characteristics driven by predominantly domestic fundamentals, a global portfolio allows investors to diversify their risk. Over the past five years global property securities have delivered superior annualised returns to global equities and fixed income1, but the primary investment rationale seems to be portfolio diversification. Property securities do not behave in exactly the same way as traditional asset classes: where 1.0 represents identical behaviour, the five-year correlations to global equities are 0.62 and to global bonds as low as 0.311. In addition, they offer the potential for attractive dividend yields – 2.9 per cent compared with 2.2 per cent in global equities1. When to invest? Provided investors’ key rationale is portfolio diversification and they take a long-term perspective, the question of timing is important but likely to be a secondary concern. While inflation is under gentle watch, the macro environment appears healthy, with decent GDP growth and benign interest rates compared to historical levels. Furthermore, employment and population growth continue to drive demand for commercial property and supply (i.e. new construction) is constrained due to increasing costs: land, labour, steel and concrete have risen approximately 15 per cent per annum during the past few years. Due to factors such as this, general dynamic, rents, occupancies and ultimately earnings have been increasing. Thus while the UK market has seen substantial investment flows into property portfolios over the past 18 months, by looking globally and taking a long-term view, we believe there are still plenty of opportunities to be found. 1 Source: FTSE EPRA/NAREIT, MSCI World and Lehman Global Aggregate as at 31-Mar-07.
