18/02/2008
Thinking Beyond Borders | Investment Week - 18th February 2008
Investors continue to focus on global property as a proxy for global economic growth and an excellent way to diversify across regions and asset classes. Recent market turbulence has created new investment angles and opportunities. Global funds with a strategic approach to property allow investors to tap both these new but also existing opportunities. However, property investors also need to be aware of the potential pitfalls of this asset class.
The current equity market downturn has created mispricing opportunities between listed and direct property markets. Many listed property companies, including those in the UK, US, and Australia, are trading at significant discounts to their net asset value (NAV). Thorough understanding of fundamental property drivers is the key to making long-term strong conviction calls and to positioning portfolio holdings correctly. Hybrid funds – those which invest in both listed and direct property markets – offer investors the additional benefit of dynamic asset allocation between these two alternatives.
While economic growth in the West is slowing down, the BRIC (Brazil, Russia, India, China) economies continue to exhibit strong momentum, growing at 5%–10% per annum. Property is set to benefit from structural expansion in investment demand as well as public and private sector consumption growth. However, because of certain restrictions on direct foreign ownership of property assets in many of these countries, listed property is the most cost-effective and straightforward way to participate in this secular growth story. Additionally, when investing in emerging markets, listed property provides investors with an additional layer of security: effective corporate governance and regular reporting give a greater level of transparency.
However, there are cons of investing in listed property. General equity investors and sentiment leads to short-term equity market volatility and a temptation to pull money out at an inopportune moment. Keeping your eyes on the prize is never more important than at times of market turbulence.
The fact that REITs and property companies are listed on stock exchanges brings volatility in the form of investor sentiment as well as the fact that the equity market reflects all available information, both accurate and inaccurate, much quicker and more efficiently than direct property. Direct property market returns are, to a large extent, rear-view mirror oriented while the public market valuation is forward-looking. New information about rents and trends in property contributes on a daily basis to higher volatility of publicly traded property companies. Like any other publicly traded equity security, listed property shares are always influenced by a combination of industry specific and broader equity market factors. But the basic principle is – serious investors cannot be distracted by market fluctuations.
As mentioned before, property is a good proxy for global economic growth, which makes it intrinsically a long-term investment. This is often misperceived as a disadvantage, whereas due to its long-term nature global listed property is a must for any investment portfolio focusing on wealth creation.
Svitlana Gubriy, Deputy Fund Manager of the Select Property Fund, Standard Life Investments.
Bull points:
- Mispricing arbitrage between listed and direct property investments
- An opportunity to effectively access fast-growing emerging markets
Bear points:
- Equity market volatility and investor sentiment
- Taking a long term view
This was published in Investment Week on 18th February 2008
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
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