Real estate: Pam Walkley
With local prices forecast to fall, overseas property looks promising
Property investors need to hold overseas real estate if they want to be diversified and reduce the risk that comes with only having domestic property in their portfolio.
This argument has become more compelling, with many analysts predicting that Sydney and Melbourne residential prices will fall over the next few years, perhaps quite substantially.
Investors who have a residential property or two plus blue-chip shares, including the big banks, may have more eggs in one basket than they think, says Chris Bedingfield, principal and portfolio manager at Quay Global Investors, “especially so since mortgages are the bread and butter of the big banks’ business, accounting for about 60%”.
Last month we looked at local alternatives to direct residential investments but offshore property is a much bigger universe. And for many just the thought of researching and buying overseas real estate direct is just too daunting.
The good news is that it’s relatively easy to get into overseas property through managed funds and mFunds. There is also one global real estate exchange traded fund (ETF) – Dow Jones Global Real Estate – listed on the ASX. Over the year to April it returned 2.29% (index 2.8%) and 12.04%pa over three years (12.5%). Researcher Morningstar details 60 global real estate equity funds on its website (morningstar.com.au).
A drawback of managed funds is that you have to pay management fees, so it’s important to know how these affect your returns. Ideally, the fund or funds you choose will have after-fee returns that beat similar index funds.
The attractions of ETFs include low fees, an entry cost of just $500 and good liquidity due to their ASX listing. A weakness is that the indices for global real estate have big shopping centre compo- nent of around 25%-30%, says Bedingfield, who manages the Quay Global Real Estate Fund. Shopping centres are suffering from the rapid growth of online competition and in economic downturns falling retail sales impact the profitability of these assets, he says.
By contrast, the Quay global fund has only 14.5% of its assets in retail. Established on July 30, 2014, it doesn’t have a long track record but Morningstar lists it fourth when it comes to one-year performance to April 30. It follows three funds from Resolution Capital, which have been around for longer. Over the year it returned 7.5% after all fees, bettering its benchmark (the FTSE EPRA/NAREIT Developed Index), which returned 3.28%. Over two years it returned 9.24%pa (benchmark 4.47%).
The success is due to sticking to developed markets – 50.2% of its holdings are in the US, staying clear of companies that develop, and picking opportunities based on demographics, says Bedingfield. Healthcare, in all its forms, is an example of this, and the fund has 9.5% of its assets in this sector.
The “echo-boomers” – 20- to 34-year-olds who often need to relocate for jobs – are a growing demographic, says Bedingfield, so apartments account for 17.7% of the portfolio. Growing demand for student accommodation is also a theme the fund has tapped into, making up 6.5% of assets.
Resolution Capital Property Securities Fund (WS), the top performer in the year to April, according to Morningstar, returned 8.31% and 12.6%pa over three years. It mainly invests in global-listed real estate trusts and securities that derive most of their returns from rental income. It includes office buildings, shopping centres, industrial warehouses, residential communities, hotels and healthcare facilities.
The minimum investment is $30,000, with a management fee of 0.8% plus a performance fee of 0.2% when it beats its benchmark (as for the Quay fund).
The Quay fund charges a management fee of 0.9% and the minimum investment is $20,000. It also has an mFund version.
Pam Walkley, founding editor of Money and former property editor with The Aus
tralian Financial Review, has hands-on experience of buying, building, renovating, subdividing and selling property.