Whether it's about real estate investment trusts (REIT) joining a new asset class, a market on the rebound or performance over the past six months, property experts have a handful of reasons why investors should be jumping into the recovering asset class.
In fact, Australian Unity has just concluded four half-hour webinars for advisers warning them that if they don't invest in property now, they are sure to miss the boat.
"We spoke about valuations and liquidity and why they should be investing," Australian Unity Investments head of property Martin Hession says.
"I think they believe the story, but I think there is a disconnect between advisers and clients. I think clients are saying 'I remember when you said that before'."
Current appeal
'Mixed' best describes planners' and their clients' current appetite for property.
"Appetite was very quiet up until six months ago," Centuria Property Funds chief executive Jason Huljich says.
"Some of the high net worths are coming back into the market."
A bottoming of the market and now the opportunity for good yield and capital gain have encouraged investors back into the sector. Huljich says two large planning groups have been so enthused by the sector that they have made the largest single investment into Centuria's funds.
"They think it's a good time to invest," he says.
Other property fund managers are not seeing any improvement in appetite for the sector.
"There is none at all. Inflows into funds are at an all-time low. Investors and advisers are looking for funds where there is no risk," Hession says.
Meanwhile, listed property or REITs, as is now the terminology used for Australian and global listed property trusts, continue to be plagued by their dull performance during the global financial crisis (GFC).
However, they are now changing their ways.
According to Zenith Investment Partners investment analyst Andrew Cassar, the previous extravagance shown by highly-geared domestic REITs towards their distribution policies was a concern for investors and planners.
"This didn't help them [REITs]," Cassar says.
However, the decision to lower gearing to levels around 45 per cent as well as the lowering of distributions from 90-100 per cent to 80 per cent has caught advisers' attention.
Further, their new approach to distributions of 'leaving some in the kitty' has made them more appealing.
"Advisers see that," Cassar says.
But the high level of concentration found in Australian real estate investment trusts (AREIT), where holdings such as Westfield account for as much as 41 per cent of the portfolio, has been another reason for planners and clients to be wary.
Such a concentration can pose challenges in structuring a truly diversified portfolio and make it difficult for advisers to integrate AREITs into client portfolios.
"We always recommend a 50/50 exposure to global and domestic REITs," Cassar says.
He says the independently owned investment research provider also encourages planners to seek out active managers that select their own REIT stocks and charge a fee.
Morningstar co-head of fund research Chris Douglas says institutional demand for property has also been weak, particularly in the case of AREITs because of this portfolio concentration characteristic.
While REITs offer investors a tax-effective structure, Douglas says any listed investment is currently struggling and therefore investors are still favouring the term deposit market.
Performance of property sectors
The appetite for defensive assets has been strong due to the performance of growth assets such as property.
While the poor performance of listed property is often discussed, Douglas says the unlisted space has also had its challenges.
"People are really disappointed by the listed property sector but even some unlisted property trusts have been frozen," he says.
While back in 2008 unlisted property was certainly much stronger, it has been lower risk in terms of its performance. In this way it has continued to be attractive to some investors, with the commercial and office part of the market doing well. The retail sector has been struggling.
But the unlisted property fund market has gone through quite a transformation in the past four years. It has become much more concentrated, with only about four managers having scale and being active. Most other funds have disappeared, been absorbed or are frozen.
Centuria Property mainly invests in commercial office, bulky goods buildings, industrial and retail property. Over the past seven years it has completed 18 funds, with an average annualised return of 18.7 per cent a year as at 29 March 2011.
Huljich says Centuria Property has been successful in purchasing property where there have been zoning changes, so properties it bought back in 2000 have moved from being industrial to residential.
This has allowed the property group, which bought a property in Spring Street, Melbourne, to demolish it and rebuild it as residential.
"Commercial has done the best. A lot of commentators are bullish on this. We are on Brisbane," Huljich says.
Meanwhile, global property funds have given investors some relief. The strong Australian dollar and the fact most funds are fully hedged has aided their positive results.
"Global property has significantly outperformed Australian property over the last few years," Douglas says.
He says the Australian property market accounts for 10 per cent to 12 per cent of the UBS Global Investors Ex-Australia NR Hedged Index. As a result, a number of funds have been underweight in the Australian property market, but some are now reviewing this approach.
The performance of different REITs on the other hand has been fairly similar in the 12 months to March this year. Cassar says this is because many managers sat around the benchmark where 80 per cent of holdings were in retail or domestic property, so performance was similar.
The fact index player Vanguard has outperformed has been disappointing for investors who selected an active approach.
"But over the longer view, Vanguard has underperformed active managers," Cassar says.
The place to be was in global property, however, managers say this approach has its shortcomings as part of a long-term investment portfolio.
"One hundred per cent global going into the GFC would have been best. But we look over seven to 10 years and tactical is not beneficial," Cassar says.
For the past 12 months, distinguishing performance between REITs has been the selection of the right stocks, particularly when you consider the hefty weighting of Westfield in most portfolios.
Advising property clients
Stand back and miss out. According to Hession this is the clear message advisers need to pass onto their clients.
"Leaving money in cash deposits is the worst possible investment you are going to make in three years," he says.
This is because the property recovery is already underway. "For example, last year capital values in offices were up to 5 per cent," Hession says.
"They fell 25 per cent in the GFC. Industrial values were 8 per cent; they fell to 23 per cent in the GFC. Shopping centres were 4 per cent, down 8.5 per cent in the GFC."
Listed property is priced daily and offers investors liquidity as well as a range of different options. Cassar says for retail clients, listed property offers a more liquid way to get their exposure to property.
But having liquidity doesn't mean investors should look to sell their investment in the short term.
"Property is not an 18-month investment. It's a 10-year investment. That needs to be understood by clients," Cassar says.
Unlisted property is more defensive, and while it has performance attributes, investors are paying the price for less liquidity.
"So there is a liquidity premium," Douglas says.
Morningstar encourages advisers and their clients to look outside Australia and more on a global basis.
"Global funds will include Australia in their mandates. You are giving up dividend yield by going global and a lot of planners struggle with that," Douglas says.
"But if you are looking at global, you give up a little income but get higher capital growth, which over time you can get the diversification."
Zenith Investment Partners advises a 50/50 allocation between domestic and global property. The major emphasis here is to get true portfolio diversification. It considers most investors' exposure to the residential property market is fine with their home and it does not allocate to direct property.
"We've got a number of global property funds who have domestic and global exposure," Cassar says.
"I would do this. Give a core global exposure. The fees are relatively in line with global managers with no domestic exposure."
Listed property versus unlisted
The gloves are certainly off when it comes to comparing what the sectors have to offer planners and their clients.
One of the issues unlisted property fund managers focus on is the said correlation between listed property and the share market, and the impact this can have on the overall performance of an investor's portfolio.
"Listed property, this is not property. Listed companies are not a proxy for property. They follow the sentiment of the share market," Hession says.
As evidence, he says while listed property plummeted 75 per cent during the GFC, the underlying property assets were not down as much.
Further, while there is a 0.6 per cent to 0.8 per cent correlation between the ASX200 and listed property, there is only a 0.2 per cent correlation with unlisted property.
It seems as though some of this thinking is now catching on, with reports that some planning groups are housing their AREIT investments in their equity allocations. Huljich says he has seen large planning groups make such changes.
Another said advantage of listed property over unlisted property is its liquidity.
However, listed property fund managers dispute this based on their experience when they offer redemptions from some of their frozen funds.
In the case of Australian Unity, it makes 2.5 per cent of the value of a fund available for redemption every quarter should investors want to redeem their units.
"When we first offered this facility, there were a lot of applications. Now when we offer this opportunity there are few applications," Hession says.
"Liquidity is only a problem when you don't think you can get it."
Some name dropping
Zenith Investment Partners rated 18 of a possible 58 property funds in its 2011 Property Sector Review.
According to Cassar, there is not a great number of property funds on its recommended list because it takes a best-of-breed approach and it doesn't rate all property managers. Further, the number of managers has not changed over the past 12 months.
The major change in its list is the inclusion of Vanguard's Property Securities Index Fund and Invesco's Wholesale Global Property Securities Fund unhedged. Cassar says the inclusion of these funds on the list gave advisers more choice and they were not an offering already available on the list.
As far as listed property strategies go, Douglas says worth a mention is Vanguard's offering, which gives investors low-cost market access to listed property through its Vanguard Property Securities Index Fund.
And this fund's passive approach has delivered. It has a 0.9 per cent a year fee on the first $50,000 and 0.6 per cent on the next $50,000 and 0.35 per cent for over $100,000. Performance to 31 May 2011 over one year was 4.68 per cent and over three years it was -12.84 per cent.
Another notable fund is the Equity Trustees SHG Property Income Fund, which has a one-year performance to 31 May 2011 of 17.15 per cent a year and three-year performance of -12.94 per cent. Douglas says this fund focuses on getting investors a defensive income stream and takes on a very different view to the index.
Property for everybody
Ultimately, the risk/return profile of an investor will be the guiding hand. A long-term investor can obviously take extra risk compared to an investor who is within five years of retirement and will want to take less risk.
"Property is right for everybody," Cassar confirms.
This, he says, is because depending on an investor's allocation, it can deliver what they are looking for.
For example, if a retiree is looking for greater income returns with some capital growth, a greater allocation to property could be astute. However, if an investor is looking for greater capital growth, it may not be in real estate.
Hession agrees property is for everyone, but stresses the liquidity issue.
He says investors must recognise property is an illiquid investment and investing in listed property is purely an investment in equities, just by another name.
For this reason, he recommends a strategy that was recommended to him by his own financial adviser. That is, just in case of a downturn, always keep a two-year supply in cash. This then acts as a buffer before an investor would have to sell any securities.
Hession says a cautious investor might make a 10 per cent allocation to property. For SMSFs that have an appetite for direct property, such an allocation would translate into a $100,000 investment for a $1 million portfolio.
"Where would they find that?"Hession asks.
According to Douglas, listed property does play a role in a portfolio because of the structure of REITs and as a defensive income stream.
"But it's not for everyone," he says.
For example, investors can gain access to defensive income via other investments, such as global listed infrastructure.
Outlook
The outlook for global REITs is expected to be positive. In a low interest rate environment where investors are looking for greater yield, global REITs are expected to be able to provide.
"It's all there," Cassar says.
And despite the European debt crisis, the Middle East and natural disasters, a more stable environment will be beneficial.
"It's an environment that is conducive for REITs," Cassar says.
A more subdued equity-orientated approach is what Douglas is hoping for from AREITs and some of the fundamentals such as a strong economy and low unemployment are on his side.
Further, he says while access to leverage allowed "things to get out of hand", less access to leverage will lead to a more sustainable result.
"They [REITs] have a role in model portfolios," he says.
Meanwhile, unlisted property puts forward a strong case.
Hession says an investor with a lower appetite for risk should invest in funds that have a bias towards office as this sector will perform the best, while retail and industrial property have a longer-term upside.
As an indicator of the potential of the office sector, he says Melbourne office values will increase by 33 per cent over the next couple of years.
"If offices across the nation have capital values up 18 per cent over the next two years and you add income onto that, and industrial are up 16 per cent and shopping centres are up 15 per cent, you have a 20 per cent return," he says.
A shortage of domestic property will continue to be a challenge. "There is $20 million to invest in Australian property so there is all this money chasing too few a properties," Hession says.
"People are not going to be able to find the assets."
