@ a glance newsletter
The outlook for Australian listed property
(February 2011)
Q&A with Mark Ferguson, Head of Australian Real Estate Securities
There seems to have been some discussion about Australian Real Investment Trusts (AREITs) in the media lately. What do you think has sparked the renewed interest?
I believe the renewed interest in AREITs has come about because of improvements within the sector such as a re-capitalisation of the sector during 2008 and 2009 which led to a reduced use of financial gearing. In terms of the distributions being paid to investors we believe the current rate of 80% is sustainable based on the good capital management of AREIT managers and certainly as property values and rental returns increase it’s reasonable to expect that this figure may rise.
So I think these type of changes within the sector, combined with the broader economic outlook for Australia have really encouraged investors to take another look at what AREITs can offer them.
Is an AREIT the only way to invest in real estate?
There’s a number of options for investors in real estate and the appeal of each option will vary depending on an investor’s circumstances, return/risk profile, liquidity needs and their investment portfolio goals.
AREITS have a number of advantages, such as liquidity and minimal transaction costs which arguably provide a more flexible investment option than direct property. Direct property is a less liquid investment option with more expensive transactional costs such as stamp duty, legal fees and bank fees. Also direct property generally requires a larger initial investment which may not be suitable for all investors.
But I think the aspect that investors find most appealing about AREITS is that the structure of the Trust requires income to be paid out to investors on a regular basis. Again, if you compare that to direct property you’re less assured of regular distributions as the investment structure for direct property isn’t geared towards distributions.
How do investors select which AREIT to invest in?
Investors can certainly invest directly in individual AREITS however this may not provide them with sufficient diversification within their portfolio. A fund such as the AMP Capital Listed Property Trusts Fund, which invests across the AREIT spectrum gives investors access to retail, office, industrial and residential AREITS. And because each of these sub sectors perform differently at different stages of the market cycle it makes sense to have access to each of the sub sectors. The advantage that a Fund Manager brings to this is the ability to vary that balance throughout the property cycle to try and achieve optimal returns.
Another reason why investors might consider an AREIT Fund rather than investing directly in an AREIT themselves is that as a Fund Manager we’re able to use our meetings with AREIT managers to give them feedback on their corporate strategy, capital management and corporate governance. In fact it’s part of our fiduciary responsibility to ensure that AREIT management teams and Boards act in the best interest of unitholders. This means that we can, and do, raise issues with management which we identify as risk factors. An individual investor really wouldn’t be able to have that same influence at Board level.
What would you say to investors concerned about the recent under performance of this sector?
Real estate is a long term asset class and investors shouldn’t get taken in by being too short term. Recent changes to the sector that I mentioned earlier could be described as ‘returning to basics’ in terms of concentrating on delivering returns based on rental income from the underlying investments.
What external/environmental factors are impacting the outlook for Australian Property?
Just like the rest of the Australian economy, Australian property is also a major beneficiary from the flow-on effects of the boost in Australia’s terms of trade due to China’s demand for Australian resources. The effects of this are quite broad but on a practical level you could imagine that continued growth in the resources sector will lead to higher demand for high quality office buildings in Perth.
Another positive factor for Australian property is the widespread adoption of sustainable property design and green ratings which measure the sustainability and operational efficiency of buildings. We know that these factors are important to tenants and the AREIT sector itself is being very proactive in terms of only developing assets with a 5 or 6 star rating. So from an investor point of view this really means that the AREIT sector is responding to community sentiment and government legislation in order to be prepared for further change in this area. AREIT fund managers, such as ourselves are increasingly demanding details of how and when the AREITS we invest in, are improving the green star ratings of their property portfolios, so we can be assured that the assets within the AREIT will be attractive to tenants.
Finally the interest rate cycle acts as a headwind for the AREIT sector as the RBA continues on its path of raising interest rates. This means that, AREITs debt costs (interest rates) are higher than yield, hence AREITS will follow their traditional investment model of collecting rent rather than debt funding property acquisitions. All in all I think the renewed interest in the sector is definitely warranted and we believe that AREITS and Australian property in general offer a good long term investment option for investors.
Important note: Investors should consider the Product Disclosure Statement (PDS) available from AMP Capital Investors Limited [ABN 59 001 777 591] [AFSL 232497] for the AMP Capital Listed Property Trusts Fund before making any decision regarding the fund. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making any decision whether to acquire, or continue to hold, or dispose of any units in the Fund. To invest in the Fund, you and your clients will need the Fund’s current Product Disclosure Statement (PDS) issued by Permanent and available from AMP Capital on its website. The PDS contains important information about investing in the Fund and it’s important you and your clients read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. You and your client should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
