Foresight Analytics Research Insight August 2018

Transcription

1 GREITs Landscape Review Allcatins frm superfunds are expected t rise; the asset class cntinues t ffer attractive attributes hwever active manager selectin warrants cautin based n histrical evidence. 1

2 Summary Superannuatin asset allcatin twards listed and unlisted real estate has steadily increased since 2013 Retail funds have the highest expsure t GREITs, aging demgraphic prfiles f several nnretail funds is expected t increase the demand fr listed real estate ver unlisted GREIT managers have experienced expnential grwth since GFC, active managers dminate the tp 10 lists by assets Unhedged GREIT strategies have benefited frm weak Australian dllar, adding 3.3% and 1.8% p.a t investr returns ver the past 12 and 36 mnths, respectively The average crrelatin f manager excess returns is lw hwever rising cst f capital and geplitical uncertainty is likely t drive crrelatin higher ging frward The data-set n GREIT manager perfrmance suggests that investrs need t be cautius when selecting active managers in this asset class T realise psitive, net f fee alpha, investrs need t select highly active, skilled managers that can deliver first quartile alpha Mdest allcatins t GREITs by Australian Superfunds The lng duratin asset prfile f GREITs and defensive incme qualities makes it highly attractive t super funds that aim t match their lng-term liabilities. As a result, allcatins frm super funds twards real estate assets has increased substantially in recent years and is expected t grw ver the next decade. Data frm Australian Prudential Regulatry Authrity (APRA) shws that Australian Superannuatin funds have been steadily increasing their allcatins twards real estate assets with the ttal allcatins rising frm 7.0% in 2013 t 8.3% in 2017, as evident in Exhibit 1. Allcatins t real estate assets cllectively nw represent 5 th largest share f the Superannuatin assets acrss the system. Within this trend, allcatins t listed prperty has increased mre mdestly frm 2.4% in 2013 t 3.2% in We expect allcatins t GREITs t cntinue their steady increase as aging demgraphic prfile f several superfunds is likely t create mre demand fr listed expsure. Exhibit 1: Asset allcatin twards listed and unlisted real estate has steadily increased since 2013, cllectively real estate asset nw 5 th largest allcatin fr superannuatin funds in Australia. 2

3 Exhibit 2 shws the grwth f cumulative dllar value in listed prperty and unlisted prperty. The data shws that super funds have higher allcatins t unlisted prperty and while the grwth rate f REITs has slwed in recent times, we believe thse funds with ageing membership have greater prpensity t allcate twards GREITs due t its liquidity benefits. Exhibit 2: Asset Allcatin t listed prperty has increased in dllar value, recent stalling in grwth rate is expected t reverse as investrs seek mre liquid expsure t real assets Decrease in grwth frm duble digits Our analysis f asset allcatin by superannuatin fund segments (Exhibit 3) reveals ntable differences, particularly acrss retails funds and crprate, industry and public sectr funds. Histrically, retail funds have allcated mre significant cmpnent f their real estate expsure twards GREITs while the later grups have favured unlisted assets. We believe this mix is likely t shift ging frward. We expect nnretail funds t allcate mre capital twards GREITs due t their ageing demgraphics prfile and regulatry led liquidity preferences. Exhibit 3: Retail funds have the highest expsure t GREITs, changing demgraphic prfiles f sme funds expected t increase the demand fr listed real estate ver unlisted 3

4 Expnential grwth in assets fr GREIT managers, Active managers dminate tp 10 list Glbal REIT managers experienced significant grwth in their institutinal assets since GFC. Exhibit 4 shws the expnential rise in assets frm 2009 t Hwever, since 2015 the asset grwth rate stalled reflecting investr cautin twards the pssibility fr central banks t gradually reverse expansinary mnetary plicies acrss the wrld. The rising assets under management cincided with rising number f prduct launches and firms ffering GREIT capabilities. While this has lead t greater chices fr investrs and increasing capacity prvisin, it has als increased the cmpetitin fr quality alpha generating ideas. The tp 10 GREIT managers by assets were mainly USA based active managers ffering bth cre and cncentrated strategies. The dminance f USA based managers in this asset class is nt a surprise as ver 50% f assets in the brad market indices is represented by USA-REITS. At least 4 managers within the tp 10 had glbal institutinal assets mre than $10 billin and while all tp 10 except Reslutin Capital (Sydney based) had assets mre than $5 billin. Exhibit 4: GREIT managers experienced expnential grwth since GFC, Active managers dminated the Tp 10 lists by AUM. 4

5 Return experience fr unhedged GREIT investrs has been very strng The vlatility f Australian dllar in recent years had ntable impact n returns frm ffshre investments. Frm Exhibit 5 we can see that hedging plicy (whether t hedge r nt t hedge GREIT expsure) frm an AUD perspective wuld have made a significant difference in returns, particularly ver 1 and 5 years. The currency translatin impact fr an unhedged investr was 3.3% ver the past 12 mnths t June 2018 and 1.8% p.a. ver the past 5 years. Over the medium term f 2 years, a hedged prtfli delivered better returns than unhedged. Exhibit 5: Unhedged GREIT strategies have benefited frm which translated int higher returns ver the past 12 and 36 mnths. Financial leverage f the sectr is nt excessive In a rising interest rate envirnment, the prfitability and viability f highly leveraged REITs can be challenged. This was the case during the GFC f 2008 where highly leveraged REITs were frced t restructure their balance sheets and undertake expensive recapitalisatins. Hwever, ur analysis f the sectrs debt t capital rati suggests GREITs are nt heavily leveraged. The current debt t capital rati fr example sits at 54.4% which is bradly in line with the three-year average (Exhibit 6). A cnservative level f financial gearing bdes well ging frward as interest rates arund the wrld mve higher. Furthermre, many REITs have an ability t pass-thrugh inflatin and as such act as a gd inflatinary hedge fr investrs. 5

6 Exhibit 6: The financial leverage f GREITs is nt excessive Crrelatin f alpha between managers is lw cmpared t ther asset classes, ffering gd diversificatin benefit at the implementatin level Rlling excess return crrelatin f active managers has been vlatile ver the time series presented in Exhibit 7 with average and median crrelatin peaking in 2011 at 0.4 and 0.6, respectively. Since then, the crrelatin f excess returns have drpped t belw lng term average hwever we expect crrelatins t rise as vlatility cmes back t the market n the back f rising inflatin and interest rates, geplitical uncertainty and maturing market cycle. Exhibit 7: Average crrelatin f Alpha is lw between managers, rising cst f capital and geplitical uncertainty is likely t drive crrelatin higher 6

7 Manager perfrmance has been cyclical and nly first quartile managers are able t keep up with fees Althugh the market has experienced a lw inflatin envirnment fr several years, lw glbal interest rates r cst f capital has cntributed twards rising prfitability and valuatin. With all ecnmic indicatrs pinting twards further nrmalisatin f inflatin and interest rates, it is likely that the asset class may face sme grwth and valuatin headwinds ging frward. Our analysis f the GREIT manager perfrmance (Exhibit 8) shws excess returns frm GREIT strategies have been mixed. In phase 1 f the data-set (frm ), realised excess return were quite healthy except fr Manager perfrmance dispersin was als quite high in this phase. Hwever, phase 2 (between 2013 and 2017), excess returns delivered by active strategies has been very disappinting except fr 2014 perid. Manager perfrmance dispersin ver this perid has als been lwer and the percentage f managers utperfrming the index (breadth) has als been lwer fr phase 2. Exhibit 8: Excess returns have been cyclical in the lng term and erratic in the shrt term Frm a risk-adjusted return perspective, the data ver the entire perid examined isn t that encuraging. As yu can see frm Exhibit 9, the median infrmatin rati (a risk-adjusted cncept that shws the unit f excess return prduced per unit f active risk taken) ver 5, 7 and 10 year perid is quite lw at 0.11, 0.20 and 0.22, respectively. Imprtantly, this number is befre fees and csts are taken int accunt. Over the shrt t medium term, the risk-adjusted returns fr the median manager d nt paint a psitive picture. That said, first quartile managers have been able t deliver sufficient excess returns t cver fr fess and csts althugh picking a first quartile manager is mre easily said than dne. Our analysis suggests that GREIT investrs need t be cautius when selecting active managers. This evidence signifies the imprtance f picking first quartile managers as an average r median manager is barely keeping up with fees. It is als quite evident frm the bxplts that as the time hrizn has increased, the variability f excess returns have subsided as well s investrs need t take a lnger term perspective as well. 7

8 Exhibit 9: Risk-adjusted returns shw cntrasting perfrmance in shrt term and lng term Weak perfrmance results symptmatic f lw cnvictin strategies Analysis f GREIT managers active rientatin (an index-relative cncept that takes int accunt bth active share and tracking errr) shws that ut f the 32 prtflis reviewed reviewed by Fresight: 5 (15.63%) were classed as Stck Pickers: Cncentrated Factr Expsures, 12 (37.50%) as Stck Pickers: Diversified Factrs Expsures, 14 (43.75%) as Clset Indexers, and 1 (3.13%) as Factr Bets Evidently mst strategies were classified as Clset Indexers meaning their active rientatin is nt materially differentiated frm the index and therefre the prpensity fr them t disappint after fees are taken ut is very high. Investrs need t be careful when researching and picking these grup f managers. Firstly, they deserve t pay lwer fees and imprtant they need t pick managers that exhibit enduring active and cmpetitive advantages. We believe, t deliver strng utperfrmance after fees, investrs need t mve away frm passive r clset indexers and fcus n high active share managers. 8

9 Exhibit 10: Investrs need t adpt high active share strategies t imprve their dds f utperfrming after fees What next? Glbal real estate investment represents a gd surce f incme and grwth fr superannuatin funds in Australia. While the recent grwth in allcatins t the listed sectr has subsided, the lng-term allcatin trend remains psitive. Member demgraphic shifts and the desire t seek expsure t liquid assets by Industry superfunds is likely see increased allcatins t GREITs. The financial health f the asset class remains slid with average financial leverage f the index sitting at arund 54%. Analysis f active manager perfrmance suggests that rising crrelatin between manager returns is expected ging frward as ecnmic and plitical uncertainty takes hld. While active management makes enrmus sense during perids f uncertainty, histrical analysis f manager alpha after fees suggests a cautius stance is warranted. We believe first quartile returns are likely t be delivered by skilled managers that have higher active share and ffer strng dwnside prtectin. 9

10 is a leading prvider f quantitative investment research, analytics and cnsulting slutins t glbal investrs, fund buyers and fund sellers. Using its innvative 360- degree framewrk and clud-based technlgy, prvides insight-based analytical and industry intelligence slutins t leading investment management cmpanies, superannuatin funds, third-party prduct distributrs, family ffices and endwment funds. 10

11 Disclaimers and Disclsures The material cntained in this dcument is fr general infrmatin purpses nly. It is nt intended as an ffer r a slicitatin fr the purchase and/r sale f any security, derivative, index, r financial instrument, nr is it an advice r a recmmendatin t enter int any transactin. N allwance has been made fr transactin csts r management fees, which wuld reduce investment perfrmance. Actual results may differ frm reprted perfrmance. Past perfrmance is n guarantee fr future perfrmance. This material is based n infrmatin that is cnsidered t be reliable, but make this infrmatin available n an as is basis withut a duty t update, make warranties, express r implied, regarding the accuracy f the infrmatin cntained herein. The infrmatin cntained in this material shuld nt be acted upn withut btaining advice frm a licensed prfessinal. Errrs may exist in data acquired frm third party vendrs, the cnstructin f mdel prtflis, and in cding related t statistical tests. disclaims any and all express r implied warranties, including, but nt limited t, any warranties f merchantability, suitability r fitness fr a particular purpse r use. This cmmunicatin reflects ur analysts pinins as f the date f this cmmunicatin and will nt necessarily be updated as views r infrmatin change. All pinins expressed herein are subject t change withut ntice. 11