Global listed property strategies are likely to pay income distributions from 30 June, 2011; however, the risks of a fluctuating currency remain, according to Morningstar’s latest listed property funds sector review.
Morningstar noted that global real estate investment trusts (REITs) did not suffer as much as their domestic counterparts during the global financial crisis. Although their asset values were reduced, rent defaults escalated and dividends were cut, more recently capital raisings, reconstructed balance sheets, and improving fundamentals meant that constraints on payouts were unwinding, the sector report stated.
The report noted that volatility in the Australian dollar resulted in large losses on currency hedging in 2008, 2009, and 2010, which by law had to be carried forward.
“This is an ongoing issue which, given the continuing instability in the value of the Australian dollar, is likely to persist,” Morningstar stated.
While the resumption of income payments was a positive development for investors, Morningstar noted that hedging losses were likely and many commentators anticipated a fall in the dollar. This meant that future income distributions from global property funds would again be threatened, Morningstar stated.
The sector review also noted that there had been a convergence between different global property strategies’ market-cap and investment-style profiles since Morningstar’s last review, with the key differences being in geographical and regional allocations.
“A number of global property strategies have been increasing their investment in Australian real estate investment trusts, because of their cleaner balance sheets and attractive yields,” the report stated. “Ultimately, the case for inclusion of a global listed property strategy in a well-diversified investment portfolio remains sound.”
However, Morningstar noted that the extreme concentration of Australian REITS and their inability to achieve meaningful diversification were causes for concern.
“Although the global financial crisis demonstrated the potential limitations of the global property asset class as a source of income, there remains a strong case for going offshore for listed property exposure,” Morningstar stated. “We remain committed to the view that employment of a globally-integrated global property fund manager which has the capacity to invest in Australian REITs is still a compelling proposition.”
Of the global property managers, Morningstar has given ING Clarion a ‘highly recommended’ rating, while AMP Capital, Perennial, Vanguard, and Zurich/Cohen & Steers were rated ‘recommended’.
