Global property securities market to double

Posted On Monday, 25 July 2005 02:00 Published by
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The listed global property securities market is expected to double to 1 trillion dollars by 2010 from its current level of 500 million dollars
By Lynn Bolin

The listed global property securities market is expected to double to an estimated US$1.0 trillion by 2010 from its current level of $500 million, while gaining popularity in many countries, according to Fidelity Investments portfolio manager Steve Buller.

Boston-based Buller, who manages Fidelity's institutional Real Estate Investment Trust (REIT)-based funds, was speaking at the 2nd annual Stanlib International Investment Conference in Cape Town, where he provided details on the growing international listed property market and outlined Stanlib's latest property investment offering, the Stanlib Global Property Securities fund.

According to Buller, the best known global property index, which captures primarily listed companies dealing with commercial institutional real estate, is the European Public Real Estate Society (EPRA)/National Association of Real Estate Investment Trusts of the US (NARIET) global property index, which has a market capitalisation of some $540 billion and spans 274 companies in 20 different countries. South Africa is not included in the index given the very small size of the listed property market.

The listed property market has experienced strong growth in recent years, moving from a market capitalisation of about $200 billion listed worldwide to an estimated $600-700 billion, with the EPRA/NARIET Global Property Index capturing about 75% of the total market.

The index continues to be dominated by the US, the world's oldest market for property securitisation, with a market share of 50%, followed by Australia with 11%, continental Europe and the UK with 10% each, and Japan at 8%. With the strongest growth most likely in the UK, Japan and Germany in the next five years, the US share is set to decline about 40% by 2010, Fidelity predicts.

Buller says that securitisation of global property is currently still low at only 11% of all property, giving the asset class substantial growth potential thanks partly to the growing demand for property as an investment class. Global property securitisation was expected to grow 10% annually over the next five years, and should reach 17% of all property by 2010.

REIT structures differ across countries, but in general offer investors exposure to the property market with some form of tax advantage, while also being required to distribute a large percentage of income in the form of dividends. The newest REIT structure is set to be launched in the UK, where legislation is scheduled to be introduced later this year.

According to Buller, the EPRA/NARIET Global Property Index has outperformed global stocks and bonds over the last 10 years (on a gross return basis), posting an annual average return of 11.31% for the 10 years to end-May 2005 compared to the MSCI World Index's performance of 6.97% and the CG World Government Bond Index return of 5.66%.

The current dividend yield was almost twice the rate of global stocks, at 3.98%, versus 2.22% (MSCI), while also offering the benefit of a low correlation to both global stocks (0.62) and bonds (0.27).

Fidelity is predicting total returns for listed property of between 7% and 10% for the longer-term (between 7-10 years), he stated, with an average dividend yield currently at 4% and average capital appreciation of between 6-6.5%.

What was also somewhat surprising, he told conference participants, was that real estate stocks were not highly correlated to long-term interest rates. Therefore, even if one thought interest rates were set to rise going forward, this was not a signal to sell one's property stocks.

"With the global economy generally expanding, real estate fundamentals are gradually improving," observed Buller. "Demand for (commercial) space is beginning to exceed supply in most markets, with fundamentals in the US, UK and Hong Kong improving the most and continental Europe improving the least. Germany has performed very poorly and this is likely to continue for the foreseeable future."

Despite the good gains seen in the share prices of the property sector, research showed that global property stocks were currently trading near their net asset values (NAVs) on average. Private valuations continued to increase, reducing any premium to NAV, while there were also significant valuation differences around the world-the UK was trading at a discount, while Japanese REITs were trading at a substantial premium.

Fidelity, one of the world's largest fund managers with over US$1 trillion in assets under management, continued to see fund flows into global listed property as well, Buller said.

Demographic trends were boosting appetites for income-producing assets, while there was also a heightened awareness of the benefits of diversification. Real estate was still one of the most "local" businesses around, he noted, giving the sector little correlation across geographies.

There had been a structural shift to include real estate in multi-asset portfolios, and institutional investment allocations to the sector were expected to increase substantially over the next five years, he concluded.

I-Net Bridge
Publisher: Business Day
Source: Inet Bridge

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