In a world of continuing market volatility and low interest rates, investors can still stay invested by seeking opportunities in the right asset classes. Property equities could be one such asset class.
Property equities have returned 13.0% per annum* over the past 10 years to the end of March 2013 – ahead of both equities and government bonds. This includes a period of significant volatility following the onset of the global financial crisis in 2007.
Property equity funds offer the opportunity to invest in a portfolio of listed property stocks and real estate investment trusts (REITs). The latter are publicly traded companies that generate recurring rental income through the ownership of commercial properties in a tax efficient structure. REITs may invest in all kinds of income producing property including shopping malls, offices, apartments, warehouses and hotels. Today, there are approximately 299* publicly traded REITs and property companies globally, with a combined equity market capitalisation of just over one trillion US dollars. The shares of these companies are traded on major stock exchanges, unlike traditional physical real estate investment.
With bond yields offering low, and in some cases negative real rates of return, property equities are becoming increasingly attractive as an alternative investment by providing an attractive dividend yield, liquidity and diversification. Globally, property equities are yielding 3.4%, with 10-year bonds at little more than 1%*. Furthermore, real estate equities have traditionally been viewed as a more defensive asset class than general equities, with lower volatility and a greater proportion of their total return being driven by income.
The characteristics of property equities markets around the world vary significantly. The different regional markets within a portfolio of global property equities can exhibit exceptionally low correlation with each other. The correlations of property equities across the regions is much lower than for other assets, because there are a variety of drivers of returns such as local supply, demand, government policies, regulation and economic factors.
The Henderson Global Property Equities Strategy
The Henderson Global Property Equities Strategy provides investors with diversification benefits in two different ways. Firstly, the fund’s property equities holdings display relatively low correlations with equities and bonds. At the same time, their high levels of income and the stability of underlying asset values make them ideal tools for reducing risk and enhancing returns in a diversified global portfolio. The length of rental agreements ensures a steady, bond-like income stream with a degree of insulation against inflation.
The strategy is co-managed by Patrick Sumner and Guy Barnard. The team collectively manage US$2.3bn globally across a suite of property equity funds (as of 31 December 2012). The global team utilises a disciplined approach where the primary consideration is their bottom-up knowledge of markets, portfolios and people. The team’s investment strategies combine a top-down approach to regional and country allocations with a bottom-up approach to individual stock selection, performed at the regional level. Concentrated portfolios are then built by selecting stocks from defined peer groups, using scoring systems designed to identify relative value.
Global property equities provided a healthy return for investors during the first quarter of 2013, although investors’ risk appetite petered out a little bit. The best performing region was Asia Pacific, ahead of the US, with Europe down overall. In Asia, the majority of gains related to the Bank of Japan’s recent monetary stimulus measures, while performance in Europe was affected by currency exchange rate shifts. US REITs saw divergent performance between the larger-cap names and their smaller peers, with the latter’s outperformance driven by greater risk appetite. Overall, the FTSE EPRA/NAREIT Developed Index gained 6.1%* in US dollar terms over the quarter.
Given this backdrop, over the first quarter of 2013, Henderson’s Global Property Equities strategy modestly outperformed its benchmark, the FTSE EPRA/NAREIT
Developed index*. The strategy of being overweight in Asia-Pacific while underweighting Europe was rewarded. The portfolio’s small-cap names in Europe also performed well. In North America the fund’s bias towards the smaller and mid-cap names reaped rewards, particularly in the healthcare space.
Outlook for global property equities in 2013
Although the global economy remains in the doldrums, consensus forecasts point to sub-par growth in 2013 and it is hard to predict how politicians will balance the conflicting demands of bond markets and citizens — none of this is new news. Whatever uncertainties exist, it may be fair to say that they are ‘in the price’ and risk appetite is increasing, although sovereign bond yields remain at record lows. Against this backdrop, we believe the income return on property looks relatively attractive and has the important advantage of being a tangible asset and a reasonable inflation hedge.
*Source: UBS, Thomson Reuters Datastream, Yieldbook, Morningstar, Henderson Global Investors as at 31 March2013. Note: benchmark is FTSE EPRA/NAREIT Developed REIT Index.
