Listed property trusts now maintain a significant part of their portfolios in overseas assets, and the move offshore is not going to abate.
Australian listed property trusts (LPTs) now have 36 per cent of their assets in overseas property, with the bulk in the US.
APN Funds Management executive director Howard Brenchley says it is essential to go global when seeking new assets.
“I think we can say property is now a global asset class,” he says.
“I was in the US last month and that was the message.”
Brenchley says property fund managers are looking around the world for assets, and APN was looking in the US and Europe.
“Everybody is looking in each other’s backyard,” he says.
“We are also seeing European, American and Asian investors buying Australian property, the same as we are buying property in their markets.”
Perennial Real Estate managing director Stephen Hayes says the reasoning behind the push for overseas property is the strength of the local property market. It means trusts are being forced offshore to look for assets.
Allco Finance Group head of global property Tim Rich agrees the Australian property market is mature, which means his company also has to go offshore for assets.
“What is happening to portfolios here is that there is so much money the manager has to look overseas, otherwise they cannot invest the funds,” he says.
But he warns buying overseas is not easy and there are problems with the quality of some of the assets on offer.
“Overseas have lots of assets that are not quite investment grade, but that eventually will go away,” Rich says.
“What we want to buy are good, solid asset classes, so we carefully assess the risk, including financing.”
Most fund managers are entering into partnerships with local real estate companies to get somebody on the ground to look for assets.
One of the first to form a partnership was boutique fund manager SG Hiscock, which teamed up with global property giant LaSalle.
SG Hiscock & Company managing director Stephen Hiscock says the reason his company looked for a partner in 2003 was that it could see property becoming a global asset class.
“People who did want to move into the international arena and did not have people on the ground were at a disadvantage,” he says.
“We sat down and saw we had to team-up with someone that had global investment capacity.
“We did look at a lot of managers, but LaSalle had the best coverage.”
Hiscock says LaSalle has 150 people undertaking property research. They are his eyes and ears on the ground.
“We don’t know the property markets overseas, so we have to have people on the ground,” he says.
“We know Melbourne and Sydney, but not Manhattan, so you have to have people who can go and talk the same language and know the local market.”
Hiscock says it is important to know the property being offered to you has not been hawked around the market for the past three years and is a dog.
“You have to have someone who can find that local information,” he says.
“If you don’t, we are going to see some dodgy portfolios by people who have a scatter-gun approach.”
Hiscock says his company has already seen some very disappointing initial public offerings for Asian trusts.
“We regard some of the offerings by Australian LPTs as not being up to scratch as well.”
Hayes has also expressed concerns about some Australian international offerings, which he sees as flawed.
“We are seeing Australian LPTs trying to buy US real estate in Australian dollars, and that is flawed,” he says.
“It exposes the investor to low returns due to the high currency finance risk.”
Hayes argues the overseas trusts are more finance investments rather than property.
“The sector is no longer offering a real estate-type return, it’s more about currency trading,” he says.
“At the moment, the currency and rates are locked in, but it will only end in tears as the stars move out of alignment.”
Hayes also argues these LPTs should no longer be called Australian property trusts, as they are no longer true to the original local indices.
“The finance risk is not in Australia as the exposure is overseas,” he says.
Perennial is an investor in property trusts, but Hayes says many have to be screened out as they have overseas investments about which the manager is uncomfortable.
“You can count what’s left on one hand,” he says.
Rich agrees managers have to be careful how they handle overseas trusts.
“In places like Europe there are lots of opportunities, but it is harder to get value,” he says.
“So we need people to find good assets, and you do that by having people on the ground who can look and speak the same language.”
Hayes says the best approach for investing overseas is through a local Real Estate Investment Trust (REIT).
“If you are going to buy overseas don’t go into a joint venture,” he says.
“We go and take an investment in a US REIT. They manage it themselves; the balance sheet is conservative.
“If I buy a US REIT with Australian dollars the US market is pricing the stock.”
Hayes argues a REIT is offering a real estate return and is a property investment, not a currency play.
It is also cutting out a line of fees to the joint venture manager, which the investor would have to pay.
“US joint venture return partner fees are exorbitant, and if they are charging enormous fees, that is then passed onto the investor,” he says.
“It is much more efficient for Australian investors wanting global exposure to go into a global securities fund.”
