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What's the home for direct-owned and listed property in a portfolio?

Investors seeking exposure to property should consider listed as well as direct property given the returns, diversification and volatility of the asset classes are very similar over the long term, AMP Capital says.

Monday, June 20th 2016, 5:59AM

Don’t tell me it’s not real estate, a white paper written by AMP Capital Co-Head of Global Listed Real Estate James Maydew, demonstrates the correlation between listed and direct property increases significantly as the investment horizon lengthens.  The daily liquidity of listed property, however, means it behaves more like equities if you only invest in the short term.

“Property, both listed and direct, is a long-term investment by the very nature of leases that are contractually committed to and the longevity of the physical assets," Maydew said. "The two asset classes are essentially the same over five years and beyond as the returns are driven by the underlying cash flows they have in common. 

"For investors who want to maximise risk adjusted returns, an asset allocation between both listed and direct should be utilised at different points in the cycle.  Listed property can also be a useful proxy for direct investors who want to get set in property but who are struggling to deploy their capital given global competition for quality assets.”

The paper also highlights how listed property can be used by investors as a harbinger of what the direct market is likely to do.  Analysis of whether real estate investment trusts (REITs) are trading at a premium or discount to net asset value (NAV) has proven to be an accurate predictor of how the direct market will move in the coming year.

“Put very simply, if a REIT trades at a premium to its NAV, the market believes its assets will appreciate above levels indicated by market pricing of the underlying direct property.  If we look at listed property in the US since 1988, whenever prices have been at a premium to NAV, direct property appreciated 96 per cent of the time in the following 12 months.”

Globally, listed property is currently trading at a discount to NAV.  The biggest discounts are in Asia, with the US and the UK markets also trading at a discount.  Australian REITs are trading at a slight premium, with larger premiums ascribed to Continental Europe and the Japanese REIT market.  

Maydew added: “In individual markets where listed property is trading at a discount to NAV, the best management teams are taking advantage of strong pricing in direct property markets, selling non-core assets and utilising the proceeds to either de-lever balance sheets or shrink their equity base by returning capital to investors.”

Don’t tell me it’s not real estate is the first of a series of AMP Capital white papers on listed property.  Mr Maydew noted: “More global investors are allocating to listed property and they are hungry for knowledge and insights about the asset class.  We intend to release a number of white papers this year on the sector more broadly as well as a range of diverse individual investment themes such as senior living REITs, shopping malls and the impact of disruptive technology on property.”

The paper can be downloaded here

Tags: AMP Capital property investment

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