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The estate of things

The growing adoption of the Reit structure is increasing opportunities

Jack Foster, Viewpoint

As more investors begin to delve into alternative asset classes to diversify their traditional stock and bond portfolios and find sources of high and stable returns, the global real estate market is becoming popular.

Since property is one of the last asset classes to be globalised, real estate investment trusts are spreading fast, providing strong diversification benefits due to the low correlation between countries’ property sectors.

Not surprisingly, with real estate being the world’s biggest source of financial wealth, the introduction of Reit structures into the UK in 2007 is one of the most talked about investment products for some time, coming after a decade of historic rises in commercial property values here.

The spread of Reit structures around the world is increasing investment opportunities as, traditionally, investors in real estate have focused on their domestic markets. In tandem with the growth in Reits has come the growth of specialised investment vehicles that transcend borders, enabling investors to access property markets as diverse as Singapore, France, Japan and the US.

But the considerable volatility seen in the global equity markets over the last few months cannot be overlooked, as property shares have suffered along with other sectors.

Significant supply/ demand imbalances for commodities have led to skyrocketing prices, sparking inflationary concerns. This has encouraged central banks in many countries to raise base rates, and has had an impact on global real estate stock markets, with real estate stocks and Reit prices trending downward for the last several weeks.

The tightening by central banks has served to increase fears of a global slowdown. As interest rates rise, substantial liquidity may be removed from capital markets. Importantly, over the long term, real estate serves as an inflation hedge as landlords can adjust rents and expenses to address inflation. But in the short term, real estate property yields compete with other high-yielding investment instruments, hence, Reits have been affected by the recent market turmoil.

However, the sheer diversity of Reit markets and the low correlation between individual Reit markets around the world should help diminish the risks of investing in global Reit funds. As real estate demonstrates very low return correlations with more traditional asset classes, a slump in stock prices should not necessarily be reflected in the long-term performance of real estate vehicles. Historically, higher rates, which make borrowing and operations more expensive, have been seen as a threat to real estate investing. This explains why Reits – particularly in countries most affected by these trends – have sold off in response to monetary tightening.

Reits in Singapore, South Africa, Hong Kong, and even the bigger economies of France, Germany, and the UK, have all seen large declines as investor concerns have grown. Nevertheless, underlying real estate markets in most of world remain healthy. Ironically (when set against the recent decline in share values), private demand, both tenant and investor demand, for properties in all the aforementioned countries remains very robust and the underlying fundamentals remain extremely compelling even in light of increases in commodity prices and interest rates.

We believe property shares outside the US continue to offer some of the most compelling medium and long-term investment opportunities and we will remained focused on those markets and structures that exhibit the strongest underlying fundamentals and most attractive values. Although commercial real estate, as an investable asset class, is still in its infancy in many countries, one of the most compelling arguments for global Reit investing comes from the fact that most real estate has still not been securitised so there are big opportunities to structure privately held real estate as public companies in the form of Reits. As more countries embrace publicly traded Reit structures, they can be expected to provide even greater diversification benefits and higher risk-adjusted returns for investors.

Jack Foster manages the Franklin Global Reit fund at Franklin Templeton Investments


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