@ a glance newsletter

The outlook for global property securities

(November 2010)

By Brett Ward, Global Portfolio Manager, AMP Capital Global Property Securities Fund

While global property securities markets have bounced back more than 80% from their lows, the market remains some 30% to 40% off peak values, with many companies trading at around a 0% to 10% discount to net asset value. In the last six to nine months we have seen a recovery in expectations for earnings across the property asset class, which could result in increasing asset values over the medium term.

Capital availability is the key to further recovery, and a good mix of debt and equity has consistently been available over the past year. Around US$50 billion of equity was raised in a six month period in 2009, and importantly, capital markets remained open to global property companies even during the Europe-driven volatility earlier this year. We expect that the increasing availability of debt should support any recovery.

Why go global?

The key reason for investing globally is to obtain diversification. Chart 1 illustrates that investing just in the Australian real estate investment trust (REIT) market results in skewed diversification as only 60% of total earnings are delivered by Australian and US retail property, with Westfield alone accounting for some 40% of the index. From a risk perspective, adding global property securities to a portfolio increases the opportunity set from both a geographic and sector standpoint. It also provides exposure to the faster growing Asian markets.

Chart 1: Australian & global indices regional and sector exposure

Source: UBS, Thomson Datastream, AMP Capital Brookfield estimates

The ability to access different markets at different points in the economic and local valuation cycle makes investing in a global property securities portfolio attractive for potential returns, and reduced risk exposures in volatile markets, as shown in Chart 2. While Australia has delivered modest annual returns at a reasonable level of volatility, this demonstrates the types of return on offer without taking on significantly increased risk. While a small market, South Africa offers some interesting REIT-like opportunities, while some of the more traditional markets such as France, the US, Canada and the Netherlands have delivered reasonable returns over a longer period of time without excessive volatility.

Active management – a case study

The global property securities sector lends itself to active management. Historical returns show that top managers have outperformed the index in both up and down markets and have done so by an increasing margin. The AMP Capital Global Property Securities Fund has outperformed its benchmark by 1.80% per annum (before tax, after fees) since inception in 2002.

Chart 2: 10 year annualised risk and return for global property securities

Source: Datastream, FTSE EPRA/NAREIT, for 10 years to 30 June 2010

An example of how effective research and manager selection can add to performance is the active trading of Prologis, a global leader in distribution and logistics facilities and services.

In mid-2008, AMP Capital’s team of global property securities analysts highlighted some concerns about the ability of Prologis to meet its sales targets, and its high valuation, trading at a cap rate of just 6%. The team anticipated a collapse in the share price, which subsequently fell from highs of US$60 to less than US$10. In December 2008, Prologis removed its CEO and sold significant parts of its business. On AMP Capital’s valuation, Prologis was incredibly cheap, trading at an implied cap rate of 11%. The Fund became a shareholder again. The stock rallied once more, and then was sold. In April 2009, Prologis issued equity at a 10% discount to market. This value triggered AMP Capital’s re-entry into Prologis shares, and the stock rose by more than 25% in a week, after which it was sold once more.

Where there is significant market volatility, investment risks are higher. However, volatility also provides valuable buying and trading opportunities. Having deep and active research enables managers to make informed buy and sell decisions in order to take advantage of these volatile conditions.

While AMP Capital is typically a medium to long-term investor, we also trade actively to improve the portfolio’s overall performance. In May 2010, the portfolio re-invested in the stock with the expectation of a medium to long-term improvement in underlying fundamentals, in both the economy and Prologis itself.

Summary

In AMP Capital’s view, global property securities markets are still providing significant opportunities for active managers over the medium to long term. Correlations are moderate across the global investment universe and valuations in many countries are looking cheap, with attractive yields on offer. The sector is supported by new equity market raisings and an increase in the availability of debt from capital markets.

Find out more about AMP Capital's property capability

Find out more about the AMP Capital Global Property Securities Fund

 

AMP Capital Investors Limited “AMP Capital” (ABN 59 001 777 591, AFSL 232 497), is the responsible entity of the AMP Capital Global Property Securities Fund an the issuer of the units in the Fund. To invest in this Fund, investors will need to obtain the current Product Disclosure Statement (“PDS”) from AMP Capital. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this article.