Due to a mixed outlook in Europe as a result of the ongoing eurozone crisis, Andrew Nicholas, manager of the £80m First State Investments’ Global Listed Property Securities fund, says he has reduced the fund’s regional exposure in order to lower risk in the portfolio.
“The negative economic backdrop is undermining rental growth, banks are reluctant to provide finance and real estate markets are generally sluggish,” he says.
“We’re concerned about some property securities companies’ ability to generate increases in income, and make sure that the ones we invest in are able to pay their dividends,” he adds.
To make sure that he gets each investment right, Mr Nicholas utilises the help of his 10-strong investment team based in New York, Sydney, Hong Kong and London.
Mr Nicholas says the fund’s global mandate has helped it to outperform the IMA Property sector, returning 80.5 per cent over the past three years (to January 31), versus 34.8 per cent for the sector. Some parts of the world, such as Australia, Canada and parts of Asia, have been performing well compared to other markets, he says.
However, the fund has underperformed against its benchmark, the UBS Global Real Estate Investors Index, which showed growth of 90.3 per cent over three years.
Mr Nicholas has increased his weighting in Australia to roughly 10 per cent, as Australian real estate investment trusts have proved themselves to be relatively defensive in the wake of current volatility, he says. “A dividend yield of 6.5 per cent remains attractive in a low interest rate environment,” he says.
He is also overweight Brazil but underweight Japan, Europe and – marginally – the US. He is underweight the UK by roughly 1 percentage point, as he does not expect a recovery there “anytime soon”.
“Demand for German residential property and all sectors in Switzerland remains high. However, city markets such as Paris, Brussels and Amsterdam are under pressure,” Mr Nicholas says.
“The London market is also in relatively good health, although demand is slipping in the office market because of job losses in the financial sector. For instance, we owned a London property specialist which we thought got a bit overvalued, so we pulled back.”
His favourite areas are retail and office property, which make up 35.1 and 18.2 per cent of the portfolio, respectively.
At a stock level, he is particularly positive about the prospects for companies such as Simon Property, a US commercial real estate company that is the country’s largest real estate investment trust, and is his top holding at more than 7 per cent.
However, the remaining nine holdings in the top 10 have less than half this weighting, as Mr Nicholas continues to err on the side of caution.
“In general, property markets have fallen since 2007/08, and it’s pretty hard to say when they will bottom out. The asset class lacks a catalyst for strong performance at the moment because of concerns about the outlook for the global economy.
“However, we believe that listed property markets are attractively valued following significant falls and offer good opportunities for the long-term, as development pipelines are limited and in some markets rents are increasing slightly.”
Simona Stankovska is features writer at Investment Adviser, an FT publication
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