Funds still look to Asia for growth

With a global prop­erty down­turn Asia still of­fers the best op­por­tu­ni­ties, Florence Chong re­ports

The Weekend Australian - Review - - Primespace -

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

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