Global listed property vulnerable to rate hikes

Global listed property vulnerable to rate hikes

Global listed property continues to provide diversification and returns benefits, but it could be at risk if interest rates increase dramatically, says Lonsec.


Lonsec's recent review of the global property sector noted a “broadening” opportunity for investors.

The review looked at 23 funds, covering 21 global property securities funds and two Asia-focused global property securities funds.

“Lonsec observed a generally consistent view that improving economic conditions would see direct property markets benefit in terms of increasing rental rates, occupancy levels, investment demand and capital values,” the report said.

However, a key question posed by the report was, "Will rising [interest] rates bite?"

“It is generally considered by investors that rising rates are negative for property investments, as an increasing cost of debt invariably leads to deteriorating fundamentals and a slowing economy ultimately leads to lower asset values,” the report said.

Lonsec senior investment analyst Sam Morris said that although rising rates are a concern, the sector has historically done “reasonably well” in rising rate environments.

“One possible reason is that rate rises typically occur during strong periods of economic growth with high business confidence, which leads to increased leasing demand,” he said.

Mr Morris also noted that investors should be aware of “additional risks” associated with the asset class – “such as the high volatility profile and the equity market risk”.

“Property securities tend to behave more like bonds in stable markets but become more like equity in periods of high volatility and crisis,” he said.

“Thus it may be considered preferable for investors to utilise more defensive global property securities funds in their overall portfolios.

“We also don’t believe investors should be relying upon global property securities funds as a source of income in an overall portfolio context – particularly those with currency hedging overlays,” Mr Morris said.

In 2014, the US REIT market outperformed the broader global securities market, Lonsec found.

By contrast, Asia – weighed down heavily by Japan – delivered the weakest returns during 2014.

The Australian REIT market – which makes up only six per cent of the global property securities market – delivered a total return of 26.8 per cent in 2014.

According to Lonsec, “Global property securities offer [investors] a long-term growth opportunity and are expected to enhance security and regional diversification to an overall property portfolio, given the concentrated nature of the A-REIT sector.”

The largest gains were in residential, storage, hotel and the healthcare sectors, with the diversified sector delivering the least growth last year.

The report concluded that the key to investment selection is to "identify funds managed by high quality investment teams and investment process, but with sufficient levels of active management".

Lonsec’s long-term total return forecast for the global property sector is nine per cent.

 

 

Global listed property vulnerable to rate hikes
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