Not based in the U.K.? Morningstar has websites that cater for investors around the globe. The below article, for example, comes from Morningstar's Australia website and takes a look not only at global property performances over the second quarter but also drills down into U.S. and U.K. trends as well as the domestic view down under.
Global listed property was the only major asset class to post a gain over the June quarter, according to the latest sector wrap-up report from Morningstar.
The index that measures the performance of global listed property, the UBS Global Investors ex-Australia AUD Index, was up 4.6% over the three months, contributing to a stunning annual performance of 36.6%.
The surprising factor behind the strong performance of global property was the U.S. real estate investment trust (REIT) market. "In the U.S. at the moment you are not getting any yield from most of your asset classes. Investors hungry for yield have piled into the U.S. REIT market, driving up the value of the sector," Morningstar senior research analyst John Valtwies says.
While big concerns hover over the U.S., in particular the debt situation and high unemployment levels, these macro themes have not had a direct impact on the U.S. REIT market.
"The US debt situation has not directly affected the U.S. REIT market. These REITs now have healthy balance sheets and can borrow at extremely attractive interest rates. Investors are attracted to the sector because of the low debt levels and secure rental streams," Resolution Capital managing director Andrew Parsons says.
The U.S. REIT market is a big component of the UBS Global Investors ex Australia AUD Index, making up more than 50% of the index. This no doubt boosted the performance of investment manager Vanguard, which outperformed all other global REIT managers. The Vanguard International Property Securities Index fund adopts a passive strategy that tracks the UBS property index, so in essence its performance was almost by default given its large exposure to the U.S. market.
Other strong performers in the asset class included ING Wholesale Global Property Securities, the Colonial First State Wholesale Colliers Global Property Securities and Resolution Capital Global Property Securities.
Valtwies says the U.S. REIT market will continue to remain strong compared with other global REIT sectors, particularly the European market where REITs could be vulnerable to systemic risk.
The Tough Go Shopping
As the saying goes, "When the going gets tough, the tough get going". But in the U.S., it seems they go shopping. Given the low interest rate environment in the U.S., the country's consumers are heading back to the shopping malls, according to Parsons.
"Back in 2009 and 2010, the U.S. consumer was taking a holiday. Now, in 2011, the consumer is back. Retail sales are strong, and given the dearth of supply, retailers are expanding and vacancy rates are falling. It's almost counter-intuitive given their unemployment levels," he says.
The lack of supply has proven to be a critical factor behind the health of U.S. REITs. As Parsons notes, construction is the enemy of REITs. Construction was halted given the global financial crisis (GFC), leading to a lack of supply. This lack of supply has now helped the shopping malls and office buildings to gradually reduce their vacancy rates.
"The U.S. office market is even doing really well in New York, where the GFC had the biggest impact. Office buildings are reducing their vacancy rates largely due to the lack of supply," Parsons says. Parsons also likes U.S. hotels, saying occupancy rates are also rising in this market.
All Over the World
Global REITs also allow investors wider access to a range of property. Valtwies calls this the "opportunity set". "There is a massive concentration in the Australian REIT market, with around 90% of REITs controlled by the top 20. Global REITs give investors a wider opportunity set that includes a greater number of REIT managers and properties," Valtwies says.
"While yields from Australian REITs remain attractive, the extreme concentration of the sector and the inability to achieve meaningful diversification are causes for concern."
Global property funds include assets such as industrial property, offices, hotels and even disaster recovery centres, which further boosts diversity.
While Resolution Capital's Parsons is positive about the U.S. REIT market, his portfolio is underweight the region. Parsons says the U.S. REIT market has outperformed the U.S. equity market over the last couple of years and could therefore be expensive.
"It has got to a stage where the multiples on U.S. REITs are trading at 15-year highs relative to the S&P 500. With record multiples, investors are now close to paying excessive prices, so we don't find any great value at this point," he says.
Although London also came under extreme pressure during the GFC, the investment firm is overweight the U.K. market. "All of a sudden, the U.K. market has roared back onto the map. We are seeing very secure income streams based on 10-year leases as people are enticed back into the market," Parsons says.
"The balance sheets of U.K. REITs are restored. They are generating strong, quality earnings and we are now talking about an undersupply of properties."
Parsons also highlights that the urbanisation trend in China is a trend being replicated around the world, creating sustainable opportunities in global property. As such, the firm remains committed to "24-hour gateway cities where tenant demand remains strong". These cities include London, Tokyo, Hong Kong and New York.
Despite Resolution Capital's underweight position to the U.S. market, the firm has garnered strong returns and Valtwies points to the "good stock-picking skills of the manager" as the key factor behind the performance of the fund.
Portfolio Implications
Morningstar believes the case for including a global listed portfolio strategy in a well-diversified investment portfolio remains sound.
"We classify global REITs as a growth asset in a portfolio. The role they play is that of a diversifier. They can also provide the portfolio with inflation protection. This inflation protection comes from the rental agreements that are revised against inflation rates," Valtwies says.
Valtwies adds that investors must make sure their global REIT managers have quality teams, and while they don't necessarily have to have "analysts on the ground," they should have the right portfolio management experience.
"These are all generic themes but are important when it comes to managing global REIT portfolios. This sector has changed a lot over the last couple of years. You have to make sure you have the right people with the right experience running the portfolio," he says.
