New property fund managers riding the current bull market will face their first major challenge in the event of a market downturn, according to Property Investment Research (PIR) associate director Dugald Higgins.
PIR’s 2007 survey of the Australian property funds industry confirmed it has continued to grow at a rapid rate.
In the past year, assets under management (AUM) have increased by 29 per cent to reach $356 billion. This brings the industry’s compound annual growth rate (CAGR) for the past seven years to 20.9 per cent and, should this remain relatively stable, PIR expects AUM to exceed $500 billion in less than two years.
Listed property trusts, unlisted wholesale funds, unlisted trusts and syndicates and property securities have all increased AUM significantly. Only mortgage schemes, the subject of adverse publicity of late, are not expected to resume trend growth.
According to PIR, this growth has been fuelled, to a large degree, by inflows from superannuation and retirement funds seeking managed exposure to the burgeoning property industry.
“[These inflows] have had an enormously positive impact and just keep on coming,” Higgins said.
“We’re in uncharted territory in Australia right now, with commercial property prices higher than they’ve ever been. You’ve always got to be wary in such circumstances, but we can’t pinpoint anything right now that’s likely to trigger an unwinding of the property sector.”
The survey found that the top 10 fund managers have retained their dominance, collectively controlling 57.1 per cent of the industry with assets totalling $203.5 billion.
Westfield Group tops the table with assets totalling $49 billion (13.8 per cent of the industry). AMP Capital Investors, Centro Properties Group and Macquarie Bank are next in line with assets totalling $26 billion, $23 billion and $21 billion respectively.
However, the results revealed that the top 10’s share of the industry continues to decline as more and more boutique fund managers emerge, particularly in the past two to three years.
Higgins said the newer managers could be in for a wild ride if and when the seven-year-old bull market turns bearish.
“If and when there is a market shakeout, the focus will shift to managers who are able to maintain value. A lot of managers have had extremely healthy returns lately, but you have to ask how much of this is a result of their expertise and how much is market forces. Anyone can add value in a bull market.”
In Higgins’ view, the managers most likely to succeed are those that have the experience, processes and intention to deliver long-term value for investors.
“You have to wonder whether new players are primarily motivated by a desire to take advantage of the money pouring into the property sector, or whether they really do expect to come in at the top and add further value. Either way, when you enter a new market, there’s always a steep learning curve.”
Higgins emphasised that many boutiques are run by personnel with a wealth of experience (many are former employees of the larger entities) and are sometimes better positioned to act quickly and tailor advice to individual client needs.
“Some of the larger fund managers can be a bit slower off the mark, simply because of the processes they have in place. Ultimately, investors need to decide whether to go with the manager who has demonstrable experience in bull and bear markets, or the manager who could be that much quicker off the mark.”
Essentially, however, it is impossible to determine which mangers will perform best in the event of a market downturn, until that downturn actually occurs.
In Higgins’ view, investors need to determine the level of risk they are most comfortable with and assess which fund(s) have the skills, experience and processes in place to deliver.
