Funds still look to Asia for growth
With a global property downturn Asia still offers the best opportunities, Florence Chong reports
ASIA’S listed property securities have collapsed in the wake of the global equities rout, despite strong demand from buyers for buildings in key Asian markets. But given the relative strength of Asian economies, fund managers say they will increase their exposure to the region, where stocks are now much cheaper than last year.
In some markets, such as Singapore, office real estate investment trusts ( REITS) have fallen by up to 50 per cent since their peak valuation. Yet, Singapore’s office rents are rising sharply, as demand outstrips supply.
In Hong Kong, while property stocks have fallen 25 per cent in value, prices in the physical market continue to surge upwards.
According to Colonial First State Global Asset Management, Chinese developers were among the worst performers because of the deteriorating property outlook on the mainland.
In January: Agile Property Holdings was down 39.4 per cent; China Overseas Land & Investments fell 18.4 per cent; and Kerry Properties dropped 17.6 per cent.
Perennial’s Hong Kong- based portfolio manager Tuan Pham says investors have repriced developers and REITs in Asia because of the global credit crisis.
Whereas pre- sub- prime investors were prepared to pay 30 times the earnings multiples for key stocks, those multiples have fallen to 10 or five times, she says.
Despite this, Peter Morrisey, portfolio manager for APN Funds Management’s global property fund, says investors’ allocations to Asia are increasing, underpinned by the region’s growth prospects. Australian investors — either directly or indirectly through their superannuation funds — have invested hundreds of millions of dollars in Asian property stocks through global property securities funds.
Since global property securities funds were first launched in Australia about five years ago, Australian property fund managers have invested more than $ 6 billion, according to research firm Morningstar.
The largest managers, such as Colonial First State, AMP Capital Investors and Deutsche Asset Management, also manage several billions more in private mandates. As a rough rule of thumb, property securities fund managers allocate about 10 per cent of the money in global funds to Japan, Hong Kong and Singapore.
LaSalle Investment Management, which handles $ 6 billion in global property securities, has around 10 per cent invested in Asian stocks.
LaSalle Investment head of client services David Quirk says $ 2 billion has been raised from Australia.
Of that, around $ 200 million has gone to Asian stocks. Quirk says the underlying market is strong throughout Asia. We see good growth opportunities in the region,’’ he says.
Macquarie Bank head of property research Rod Cornish says there is a disconnect between the pricing of Asian REITs against the strong underlying direct property market.
Cornish says Hong Kong’s property developer stocks have fallen 25 per cent at a time when the Hong Kong residential market is growing at 25 per cent.
Hong Kong has also followed the US in cutting interest rates ( because its currency is pegged to the US dollar), with borrowing rates in Hong Kong among the lowest in the region.
Cornish referred to 1994 when Hong Kong’s low interest rates led to a boom, with property appreciating at 30 per cent a year in the following three years.
APN’s Morrisey likes Hong Kong listed developers such as Sun Hung Kai Properties and Hang Lung Properties.
AMP Capital Investors’ portfolio manager for its global property securities fund, Charles Wong, says the residential prices are forecast to rise 40- 50 per cent this year.
But he says that is too bullish. AMP Capital’s house forecast is a more conservative 20 per cent’’ price rise.
Wong says the Hong Kong economy is strong, supported by the recent government budget, which had measures to ensure continuing growth.
Perennial’s Pham says only a small number of companies are trading at net asset value or at a small premium in Hong Kong.
Hong Kong is still benefiting from China’s growth and many of its listed property companies have exposure to China. Hong Kong’s first listed vehicle, the LINK REIT, remains the best performer.
Matt Nacard, head of research in Asia for Macquarie Capital Securities, says LINK REIT has earnings per share of growth of 8- 7 per cent.
It has the lowest risk among Hong Kong’s listed trusts, most of which are trading at a 20 per cent discount to the net present derived value. He says Hong Kong is one of the few markets in the world where there is a positive spread between financing cost and yield. The cost of mortgage is 2.75- 3 per cent and the rental yield is 4 per cent.
With inflation rising at 4 per cent, investors are looking to property to provide a hedge.
Perennial is a bottom- up stock picker, meaning it selects every one of the 23 stocks in its portfolio individually, based on its performance criteria.
In the last three months we have been more active and buying more stocks in Asia, which we see as having reasonable performance in the next one to two years,’’ Pham says.
AMP Capital Investors, which invests at least $ 4 billion in global property securities, is looking at increasing its Asian REITs exposure.
We are going for household names,’’ Wong says.
His preference is defensive REITs, such as the Capita family ( sponsored by the huge CapitaLand group).
These trusts have the potential to grow internally. They are not highly geared and have solid portfolio of prime, well- located assets.
Pham says S- REITs ( Singapore REITs) are down 18 to 20 per cent on net asset value ( NAV) on Perennial’s numbers. S- REITs are definitely very cheap now. Office REITs are trading at a 30- 50 per cent discount to NAV,’’ she says.
LaSalle’s David Quirk says Singapore’s office market, where supply is tight, is expected to produce rental growth of 25- 30 per cent between now and 2010.
Pham says that in this kind of environment even a bad manager can’t go wrong.
Macquarie’s Nacard says S- REITs have been over sold, because of concerns that Singapore’s economy is leveraged to the US.
Japanese REITs ( J- REITs) have been swept up in the global gloom and doom because of concerns about their access to capital.
Nacard favours the biggest REITs — Nippon Building Fund and Japan Real Estate — while he stays away from the less liquid smaller J- REITs.
Similarly, Perennial also shies away from these stocks, because they have to rely on acquisitions and gearing for accretion. They are unable to grow organically.
US REITS used to represent at least 50 per cent or more of global asset allocation, for the simple reason that the US represents more than half of the global listed property securities market.
Morrisey says that according to benchmark indices, US REITs are down to 34 per cent in weighting, with Europe taking up almost 14 per cent, Britain 8 per cent, Asia 35 per cent and Australia 11 per cent.
The average drop in the value of global REITs is 15 per cent, compared to the US and UK REITs trading at around a 17 per cent discount, he says.
While US REITs may be cheap, says Perennial’s Pham, the US economy is going into a recession and funds invested there would be dead’’ money.
It is better to put the funds in Asia, even though the region is not immune to a global slowdown.
A 1997 style financial crisis in Asia is unlikely,’’ she says.
Rising high: Hong Kong is still a mecca for property development