Does Unlisted Property still have a role to play in a well diversified investment portfolio?

Transcription

1 Does Unlisted Property still have a role to play in a well diversified investment portfolio? Tony Mount Chief Investment Officer Annual Portfolio Construction Conference August 2009 Becton Investment Management

2 Disclaimer This presentation is provided by Becton Investment Management Limited and is for general information only. Opinions expressed are our present opinions only and are subject to change. In preparing this presentation, we have obtained information from sources we believe to be reliable, but do not offer any guarantees as to its accuracy or completeness. The information contained in the presentation is general in nature and in preparing this presentation Becton Investment Management Limited has not taken into account the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision, a prospective investor should consider, with the assistance of a financial and tax adviser, whether an investment is appropriate in light of their particular investment needs, objectives and financial circumstances. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions. Subject to law, none of the companies of Becton Investment Management Limited or its respective directors or employees, accepts any responsibility or owes any duty of care to any person acting, or refraining from acting, as a result of material in this presentation. Becton Investment Management

3 Introduction Benefits of direct property in a well balanced portfolio remain Secure tax deferred income Capital growth potential Lower volatility and low correlation Tenant demand & capital value recovery better positioned than early 1990s recession

4 Australian Rental and Tenant Outlook Income in unlisted based on rent from underlying properties Most unlisted fund exposed to office, retail and industrial sectors Outlook for most markets positive, when compared to 1990s downturn

5 Office Sector For most office peak vacancy forecast remains at or below the long term average Well below early 1990s vacancy CBD Office Vacancy Outlook Office Market 20 Year Average Vacancy Vacancy at Jul 09 Peak Vacancy Peak Vacancy Peak Vacancy Forecasted by Forecasted by During 1990's Knight Frank Urbis Recession Sydney CBD 9.9% 7.7% 10.0% 8.2% 22.5% Melbourne CBD 13.1% 4.8% 8.7% 10.9% 25.8% Brisbane CBD 8.1% 10.7% 12.0% 17.0% 14.3% Adelaide CBD 13.5% 5.5% 5.0% 10.5% 19.8% Perth CBD 13.5% 8.0% 15.0% 20.9% 31.8% Source: Knight Frank (March-May 2009), Jones Lang LaSalle (Jun 2008), Property Council of Australia (August 2009) and Urbis (May 2009)

6 Office Sector 1990s office markets faced a huge oversupply of new building Supply forecasts have been revised down by 463,000m2 (1) for 6 months ending December 2008 Increases in office vacancy is predominantly caused by excess supply not reduced demand negative net absorption was 315,000m2 (2) which is <3% of current stock (1) Jones Lang LaSalle, December 2008 (2) Jones Lang LaSalle, June 2009 Actual/Forecasted Gross Office Supply at Commencement of 1990s and Current Downturn % of Total Stock 20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Sydney CBD Melbourne CBD Brisbane CBD Adelaide CBD Perth CBD

7 Retail Sector Positive outlook supported by 3 core factors 1. Retail turnover remains strong 7.1% increased in 12 months to May 2009 (1) 2. Strong population growth: 370,000 pa vs 200,000 pa (2) 3. Westpac Consumer Sentiment Index improved significantly in May & June 2009 (2) (1) Australian Bureau Statistics, June 2009 (2) Access Economic, June 2009

8 Industrial Sector Industrial sector has weaker outlook. Resilience of economy has translated to resilience of tenants Oversupply of land, not necessarily buildings Industrial Market Indicators Industrial Market Land Values Rent Melbourne -17.5% for 12 months to Mar % for 12 months to Mar 09 Sydney % for 6 months to Mar 09 Nil growth so far in 2009 Brisbane -26.0% for 12 months to Mar % for 12 months to Mar 09 Perth -11.3% for 12 months to Mar % for 12 months to Mar 09 Adelaide - 5.7% for 12 months to Mar % for 12 months to Mar 09 Source: CB Richard Ellis (April 2009)

9 Capital Values Outlook Global financial crisis has re-priced risk Capital values will continue to be under pressure while there is a lack of capital demand (equity & debt) for property Capital values sliding but there are some positive indicators: Property yields high compared to Bonds More attractive than early 1990s

10 Bond Yields v Composite Property Yields 10 Year Bond Yield versus Composite Property Yield (Jun 1989 June 2009) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Bond Yield Composite Property Yield Source: Investment Property Databank (March 2009), Reserve Bank of Australia (July 2009) Note: 10 Year Bond Yield is for 10 Year Treasury Bond. Composite Property Yield is Composite Property as defined by Investment Property Databank

11 Role of unlisted property Unlisted property trusts can reduce overall risk through: Lower volatility Low correlation with other asset classes

12 Lower volatility Volatility consistently lower than equities & REITs Increased gearing decreases the benefit Volatility of Total Return Investment Sector 10 Year Annualised 20 Year Annualised Volatility Volatility if 55% geared Volatility Volatility if 55% geared Retail property 3.6% 7.9% 2.9% 6.4% Office property 4.1% 9.2% 6.6% 14.6% Industrial property 3.2% 7.1% 5.3% 11.7% Composite property 3.3% 7.4% 5.0% 11.2% S&P/ASX LPT % n/a 15.4% n/a ASX All Ordinaries 15.5% n/a 14.3% n/a CBA Bond: All Series, All Maturities 5.1% n/a 6.4% n/a Source: Investment Property Databank (March 2009)

13 Low correlation to other asset classes Property behaves differently to other asset class 10 year correlations ending June 2009 Investment Sector Australian Composite Property S&P/ASX ASX All CBA LPT 300 Ordinaries Bonds Inflation Australian Composite Property 1 S&P/ASX LPT ASX All Ordinaries CBA Bonds Inflation Source: Investment Property Databank (March 2009)

14 Low correlation to other asset classes Property more stable & resilient but not immune to a major correction either Australian listed versus unlisted property performance (12 month rolling returns to 31 May 2009) Source: MLC (July 2009)

15 Return volatility remains less extreme For FY09, IPD Australian Pooled Property Index shows a -12.6% total return for unlisted property trusts against a - 7.2% total return for direct property values (80% of the properties were revalued in calculating this return) In the same period, ASX REIT recorded a total return of 37.7%, ASX All Ordinaries -11.6% and JP Morgan Fixed Income GBI 7-10 Year index 10.4%

16 Highly Geared Unlisted Property Caution advised with highly geared unlisted trusts: Rising interest rates and margins will reduce their distributions Leverage effect of gearing will magnify capital reduction in unit price

17 Highly Geared Unlisted Property Trusts Decrease in Net Asset Value for Unlisted Office Property Trust Cap Rate Softening Decrease in Office Value Decrease in Net Asset Value for Office Property Trust* 0.50% 7.5% 16.6% 1.00% 13.9% 30.9% 1.50% 19.5% 43.3% 2.00% 24.4% 54.2% 2.50% 28.7% 63.9% *Assumes 55% LVR

18 Conclusion More pain in short term Medium to long term outlook bright, especially in comparison to early 1990s Performance of direct property consistent with history of sustained earning, lower volatility & low correlation Beware of highly geared unlisted property trusts

19 Does Unlisted Property still have a role to play in a well diversified investment portfolio? Tony Mount Chief Investment Officer Annual Portfolio Construction Conference August 2009 Becton Investment Management