Property worthwhile, but far from stellar

The days of stellar property returns are over, but returns are still in positive territory, claims a property funds manager.

APN Funds Management director of retail Mike Doble said property returns were lower than the highs of five to 10 years ago.

“With the substantial capital growth in the value of property and property securities in recent years, the yields or income returns on new property investments are much lower than they once were,” he said.

“Therefore, fund managers and investors have to be even more selective about how to source quality and relatively high income returns from property.”

Doble said the UBS Global Property Index yield is just 3 per cent, but most property managers were looking to outperform as investors would not accept these returns.

“No investor complains about receiving significant capital growth, as produced by the global property securities markets during the last 12 months. But when capital growth declines, you need to ensure those income returns that remain are attractive,” he said.

“We prefer to target higher income returns at about 6 per cent, even if it means foregoing some capital growth, because our investors need consistent and sustainable income.”

Doble said property was still one of the best income returning asset classes, but investors should forget funds delivering the returns of 10 years ago.

This was particularly true with listed property trusts (LPTs), which now increasingly resemble equities as they take on more risk regarding leverage and corporate earnings.

“While the risk profile of LPTs has changed, the fundamentals have stayed the same,” he said.

“A diversified portfolio can produce substantial, steady income, even when capital growth has diminished.”

Doble said the solution for investors was to target property managers who have a focus on income rather than total returns and have a diversified portfolio of listed, unlisted and direct property securities in both local and overseas markets.