Real Estate Securities

Transcription

1 FOR PROFESSIONAL ADVISERS AND INTERMEDIARIES ONLY Real Estate Securities A Global Introduction Introduction and Characteristics Real Estate Investment Trusts (REITs) and listed property companies issue publicly traded stocks that provide indirect access to the real estate asset class. Issuers of real estate securities own and operate income-producing real estate such as hotels, office, industrial, residential and retail properties, and can also finance real estate and developers. The transparent tax treatment of REITs gives investors in REIT securities access to the same cash flow characteristics that would otherwise only be available to direct real estate investors. The introduction of listed real estate stocks worldwide has created new investment opportunities for strategic asset allocation. The real estate securities market has grown exponentially around the globe with the help of governments encouraging REIT structures that provided diversified saving vehicles through legislation. Demand for real estate securities partly came from ageing populations searching for higher levels of income, lower volatility, higher liquidity and greater transparency. Institutional investors and pension schemes have also started to embrace REITs as a liquid, low cost way of accessing real estate as well as increasing diversification in their overall investment portfolios. However, listed real estate securities remain a largely untapped investment option for many investors yet to recognise the benefits of this asset class. Securitisation of real estate is also set to continue. Listing of REIT IPOs peaked during ; however, new listings have slowed due to the recent global financial crisis. As shown in the table below, there is still significant opportunity for securitisation within the real estate sector, with only 6.5% of investment grade global real estate listed. Total Real Estate ($bn) Listed Real Estate ($bn) % Listed to Total Australia % Continential Europe 5, % Japan 1, % HK/China % Singapore % UK 1, % US 5, % Global Study Sample 16,074 1, % Total Real estate represents total investment grade real estate Source: EPRA, UBS, Macquarie 1

2 Global Recession Performance of all asset classes in the last two years has been significantly impacted by the recent recession and the global-macroeconomic environment. The global recession has caused real estate values around the world to decline, with global listed real estate securities falling 7.2% in 2007 and a massive 45% in This decline in listed market values reflected falling direct real estate values, a deteriorating outlook for rents and vacancies, tighter credit market conditions, and the impact of equity raisings undertaken to reduce gearing levels The performance of REITs during the last 2 years shown below highlights the severe drop of the sector over 20 and the first quarter of More recently, with signs of economic recovery emerging and this leading to improved investor sentiment, listed real estate stocks have bounced back sharply. The re-strengthened balance sheets following large equity raisings and signs that credit markets are starting to open up again also helped restore confidence % 30.00% 20.00% 10.00% 0.00% % % % % % % % May 06 Jul 06 Sep 06 Nov 06 Jan 07 The Credit Crisis Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 09 Mar May The credit crisis that hit the world in 2007/20 reduced the availability of capital, increased cost of equity and increased risk premiums embedded in credit spreads. Credit spreads reflect the risk premium for different levels of credit quality. As shown in the chart below, the risk priced into the lower ratings of credit peaked this cycle in the US during December 20. The impact of the credit crisis on real estate was higher cap rates which put pressure on asset values, despite stable or even growing Net Operating Income. However, real estate securities have shown some resilience from the credit crisis due to their ability to raise capital in the equity markets. Details of this are provided in the following section Dec 07 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 09 AAA AA A BBB BB B Feb Mar Apr May Jun As the chart above shows, credit spreads have again narrowed and the larger, better quality real estate companies have had success issuing debt at significantly lower cost than only a few months prior. The listed market responded positively to these developments, however, some of the main beneficiaries of the market rally have been lower quality, more highly geared stocks where significant risk remains around their ability to repay or refinance debt. This will be an important issue to consider over the medium term in order to separate long term outperformers that have the ability and strategy to effectively utilise their capital from stocks that may still struggle to emerge unscathed from the global financial crisis. The reduction in credit spreads has assisted in taking some of the pressure off real estate companies to de-leverage. It certainly is not easy to obtain debt, nor is it as cheap as the levels, however, equity raisings have assisted in creating headroom to debt covenants that were previously in danger of being breached. Impact of Recent Equity Raisings The recent turmoil in financial markets has been a big challenge for real estate securities. In response to this, listed real estate has illustrated its ability to access different sources of capital and maintain liquidity in a time when private real estate companies have not had the same success. Through equity raisings, companies have been able to improve their financial strength and flexibility. Further, issuing equity demonstrates that real estate securities are able to solidify their financial position as well as plan for future opportunities through their access to capital markets. There have been many other secular changes and events within global markets that have influenced the availability of debt and equity. For example, during the second quarter in 2009, Chinese developers benefitted from policies that governed credit and land bank premiums being relaxed, which lifted pressure from developer s balance sheets. Jul 09 The below graph shows the large amounts of equity recently raised in Australia, the US and Europe since 31 December FTSE EPRA NAREIT Developed USD Index, Bloomberg

3 REITs vs. Direct Real Estate Australia US Europe Source: Macquarie, Datastream The Yield Story Real estate securities historically offer higher dividend yields compared to the broader equity market. This is partly due to legislation that requires REITs to maintain a minimum payout ratio. As a result, REITs have the capacity to deliver solid cash flow to investors in both up and down markets as these cash flows are linked to rental income backed by long term leases. The yield offered by listed property can differ substantially from country to country. For example, in the US over the last three years, equities generally had relatively low yields, while the yield offered by real estate securities was much higher, as shown in the graph below. Regardless of whether the investor held T-notes or the broader market stock, the yield received from holding REITs was almost double at the peak during that period. REITs offer many advantages to investors that direct property does not. Investors can potentially benefit from increased liquidity, greater corporate transparency and governance, real time pricing and lower transaction costs. The value of stock-exchange liquidity enjoyed by listed real estate has been highlighted in the last 18 months. When an investor in direct property wishes to re-allocate their funds assets may need to be sold at a discount (particularly in the current environment), and the investor may incur high transaction costs in order to do so. This price of illiquidity can be very frustrating and costly for an investor. REITs also provide investors with access to the cash flow characteristics that are normally only associated with direct commercial real estate investment. Real estate securities offer the potential for a substantial income yield, as well as the potential for capital returns earned on the stock. A perceived advantage of unlisted property is that of lower volatility. However, this lower volatility exists only because the direct property is not consistently marked to market in the same way REITs and listed property companies are. In the event that a direct property is sold, the final price could end up substantially different to the book value, and in many cases can end up reflecting the values already priced into the listed market. In the graph below, we can see that historically, the returns provided by REITs have far outweighed the direct property performance. Only recently have the REIT returns fallen hard, and in doing so, raised the volatility associated with the investment class. Over the last 20 years, the average rolling per annum return for US REITs (+9.8%) has exceeded the return for direct property (+8.0%) including the impact of the recent downturn in the listed market % % % % % 0.00 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar- Jul- Nov- Mar-09 US REITs, 3Yr Avg = 5.0 S&P 500, 3Yr Avg = Yr T Note, 3 Yr Avg = 3.2 0% Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar- Mar-09 However, it must be noted that care needs to be taken when judging a REIT on its dividend yield merits. During the last 18 months, there have been cases of REITs not being able to deliver on their dividend promises. This was due to a combination of deterioration in earnings as well as the inability and/or higher cost of refinancing debt. It is therefore important to assess the overall financial structure of each individual REIT in determining the reliability of its underlying net income. NCREIF Index (direct) Source: Macquarie, Mercer NAREIT Index (listed) 3

4 Benefits of Investing Globally A global approach to investing in real estate securities not only opens up the investment universe to potentially stronger returns, but it can also reduce risk through diversification. The accessibility of markets all over the world due to the development of investment infrastructure and vehicles allows global REIT investing to be simple and cost effective. There are many other aspects which highlight the diversity of global markets. For example, the GDP growth patterns of major economies can vary significantly and also have a large impact on real estate securities markets. Growth in GDP provides incremental demand for real estate of all kinds, expanding the stock of real estate and creating viable investments through development and upgrading. This variation is shown below: Real Estate securities have historically had a low correlation with equities, bonds, and direct Real Estate, and between listed properties in different regions. For example, the graphs below show the correlation of various countries with the US real estate securities, as well as between US direct and listed property Jan 06 Jul 06 Jan 07 Jul 07 Jan Jul Jan 09 Jul 09-1 Australia Belgium Canada China France Germany Hong Kong SAR Italy Japan Netherlands Norway United States Source: Macquarie, Datastream 0.8 Japan Hong Kong Singapore US 5yr Bonds Opportunities and Outlook of REIT markets Source: Macquarie, Bloomberg, NCREIF, NAREIT, UBS While the last 18 months have shown increasing correlations, this is a function of the global financial crisis which has impacted all listed equities, and in particular financial stocks, in the same manner. The graph below shows the correlations of different sectors within the global real estate securities universe. At different times, sectors can vary greatly from each other, allowing a global portfolio to take advantage of different opportunities within sectors as well as countries The advantage of global investment stems from an understanding of the diverse investable markets. Factors which differentiate returns, and hence produce low correlations of returns within countries include: local fundamental real estate drivers Differences in capital markets Investment structures Investor base Return expectations A brief summary of the factors in each market is provided in the following section of this paper North America North America has a mature and diverse public REIT market with companies that are more segmented and specialized in terms of property type than in other regions. In addition, the public real estate capital markets are well developed with an active market for REIT unsecured debt, commercial mortgage backed securities, REIT preferred equity, and REIT derivative contracts. 0.2 Oct-93 Oct-94 Oct-95 Oct-96 Oct-97 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct Office and Residential Diversified and Retail Residential and Retail Office and Retail Source: Macquarie, Bloomberg, UBS

5 30,000,000 25,000,000 20,000,000 15,000,000 - The amount of debt held by a real estate security issuer can have a big impact on its performance, especially in recent times. The graph below reflects the vast increase of bank lending to UK property companies, showing the ease at which they could access credit in the last few years. However, these property companies have been forced to reduce these debt levels via asset sales or equity raisings. Bank Lending to UK Property Companies 10,000,000 5,000, Source: Macquarie, Datastream Common Stock Senior Debt The credit crisis has made financing much more expensive and has increased the perception of risk associated with real estate securities. This situation has spurred on the need for equity raisings and secondary offerings as a way to recapitalise and reduce debt, which in turn offsets the perceived danger that comes from being over-levered. The re-capitalisation of the sector has given firms the opportunity to shore up balance sheets, as well as provide the necessary capital required to take advantage of opportunistic acquisitions that are likely to emerge. Asia The Asian listed real estate securities market is in an earlier stage of development compared to its global peers. However it has very strong growth potential driven by property development and the expansion of REIT markets. While often designated as one regional market, each country is driven by different local factors including tax, accounting treatments, financial regulations, equity market participants and underlying real estate fundamentals. Further distinction is made between the more passive property investors or REITs and the real estate developers and landlord companies, which are significantly larger than the REITs in terms of market capitalisation. Stock returns in this region are driven more by capital gain rather than the return of income to investors (dividends) and therefore can result in greater volatility of returns, albeit with greater total return potential. Europe Although the European direct real estate market is mature, the listed market is in an earlier stage of development in comparison to the North American and Australian regions. European real estate companies tend to be diversified across countries and sectors, rather than having the specialized focus of their US peers. Net Asset Value (NAV) analysis has typically been the main focus within this market but with the introduction of REIT legislation and the conversion of property companies to more tax transparent REIT vehicles with specific rules regarding payout ratios etc, other valuation metrics are being increasingly used. Source: Bank of England, UBS Consumer confidence has been severely weakened within Europe, fuelled by the labour market and, in particular, the expected continual rise in the unemployment rate. However, as confidence slowly improves, investors cautiously contemplate entering the equity market once again. The European economy is expected to continue to direct the movement of the real estate securities market. Australia The Australian real estate market is a more mature market compared to its European and Asian peers, and is generally higher yielding and dominated by REITs. It is a concentrated market, dominated by retailer Westfield Group, and stocks are well diversified across sectors as well as geographies. Australia has had one of the best performing economies during the global financial crisis, having avoided a technical recession with only one quarter of modest GDP decline. The Australian Government s fiscal stimulus payments have provided a further substantial boost to consumer confidence and with it retail spending which has seen consumer spending grow solidly. Combined with the benefit from the upswing in China, it is expected that the Australian economy will remain one of the better performing economies in the OECD. Much like the US, Australian REITs have undertaken numerous capital raisings, with many stocks raising equity twice over the past 12 months. Earnings are expected to continue coming under pressure as vacancies rise and rents fall, however, asset values have now been written down to historical long term averages (or lower) and further devaluations are expected to be more subdued. Buyers are starting to step back into the market with the number of direct real estate transactions starting to pick-up. With restrengthened balance sheets and improved debt availability, greater clarity on the outlook for REITs is now possible. 5

6 Why Invest in Global REITs? There are many advantages of the global REIT story as an investment, in an increasing or a decreasing market. Liquidity: The investable universe of global REITs has grown dramatically to allow for significant breath of investment. As more countries expand to partake in the diverse, tax-efficient structures, the opportunities to investors expand. This provides liquidity and accessibility, which is especially important at a time when direct investments prohibit reallocation, or provide it at very high prices. Yield: As the global population places growing emphasis on the importance of income yield in an investment, the attractiveness of listed real estate is increased. REITs have historically had higher yields than both the bond market and the broader equity market. Access to Equity: REITs have recently enjoyed the unique position of being able to raise vast amounts of equity. The benefits of this are two fold; companies can de-lever and consolidate their balance sheet, and secondly they can take advantage of acquisitions in the direct property market which may priced at large discounts. Competitive Performance: Over the long term, REITs provide competitive returns relative to other asset classes. The catalysts to this are the defensive characteristics of the underlying real estate, the substantial dividend yields and the high free cash flow. These factors provide greater certainty and stability to the nature of the total return. However, every investment comes with risk. Some of the risk factors that should be considered in respect of investments in real estate securities are: CF Macquarie Global Property Securities Fund Investors can access the Global REIT sector using the CF Macquarie Global Property Securities Fund. The Fund aims to provide investors with a total return over the medium-tolong term consisting of capital growth and income. The Fund invests in a global portfolio of REITs diversified by property types and geography. Macquarie s Real Estate Securities team is highly experienced, having managed REIT portfolios over the last 16 years. There are 16 investment professionals, including six portfolio managers, dedicated to the team based on the ground in North America, Europe, Australia and Asia. This allows stock selection to be tailored to the specific real estate securities market in each region. We believe that; Real estate is predominantly a regional asset class driven by unique factors in each market Stock selection must be tailored to individual markets On-the-ground experience is essential in the management of global real estate securities The investment process followed by RES includes a regional asset allocation which tilts the portfolio towards the regions which we believe will outperform over the near term. This process assesses each region on a number of quantitative and qualitative factors. Given the low correlation of returns between regions and countries, additional value can be added through active regional and country allocations. the fact that real estate securities are listed stocks means that they are affected by general market volatility; the potential impact of a downturn in the wider property market or sector specific performance issues such as lower rental rates, increased vacancy rates or changes in management strategy; and investing in a concentrated asset class as opposed to investing across the entire market may mean that the portfolio is subject to greater volatility than a more diversified portfolio. 6

7 Key Static details CF Macquarie Global Property Securities Fund Launch Date 22 June 2007 Fund structure Share classes UK OEIC A (retail) B (institutional) Initial Charge 4.5% (A), 0% (B) Annual Charge Type of share XD dates Distribution dates Valuation point Benchmark IMA sector Min investments ISA Yes SEDOL 1.6% (A), 0.95% (B) Income Accumulation Sep (I), Mar (F) Nov (I), May (F) 12 noon GMT FTSE EPRA/NAREIT Developed Total Return Index Specialist 1,000 (A) 250,000 (B) B1W2J69 (A-Acc) B1W2HK9 (A-Inc) B1W2JZ8 (B-Acc) B1W2JZ8 (B-Acc) Regional Allocation (as at 31 October 2009) Asia 31.19% Cash 1.63% Australia 11.47% North America 38.35% UK 6.11% Sector Allocation (as at 31 October 2009) Diversified Real Estate Activities 21.42% Real Estate Operating Companies 4.50% Real Estate Development 6.41% Europe 11.25% Retail REIT's 22.69% Office REIT's 11.45% Diversified REIT's 10.21% Cash & Cash Equivalents 1.63% Industrial REIT's 5.20% Residential REIT's 6.54% Specialised REIT's 9.94% 7

8 For more information please contact: macquariefunds.co.uk This document is issued by Macquarie Bank International Limited ( MBIL ). MBIL is registered in England No , and is authorised and regulated by the Financial Services Authority (FSA). The Authorised Corporate Director of the CF Macquarie Property Securities Fund is Capita Financial Managers Limited, Ibex House, Minories, London, EC3N 1DX. This document is only being distributed to and is only directed at professional clients and eligible counterparties, as defined in the FSA rules. It is not intended for retail clients and such persons should not rely on the information in this document. The transmission of this document to any other person in the UK who is not an eligible counterparty or a professional client is unauthorised and may contravene the Financial Services and Markets Act The CF Macquarie Global Property Securities Fund is a sub-fund of CF Macquarie Investment Funds. Applications may only be made on the basis of the current Prospectus. A copy of the Simplified and Full Prospectus and the latest Annual and Interim Short Reports can be obtained by calling The value of investments and any income from them will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a reliable indicator if future performance. Where MBIL has expressed views and opinions these may change. Macquarie Group entities, its associates, officers or employees may have interests in the assets which the Fund will invest in from time to time, by acting in various roles including as investment banker, underwriter or dealer, holder of principal positions, broker, lender or adviser and may receive fees, brokerage of commissions for acting in those capacities. Investments in the CF Macquarie Global Property Securities Fund are not deposits with or other liabilities of Macquarie Bank Limited, or any entity in the Macquarie Group, and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. None of Macquarie Bank Limited, nor any other member company of the Macquarie Group, guarantees any particular rate of return or the performance of the CF Macquarie Global Property Securities Fund, nor do they guarantee the repayment of capital from the CF Macquarie Global Property Securities Fund. The Macquarie Group comprises Macquarie Group Limited and its worldwide affiliated entities. 1