Global real estate investment trusts (Reits), which have strong balance sheets and acceptable levels of gearing, also allow shareholders access to specialist and niche sectors often not available to the mainstream market.
Most subsectors enjoy favourable fundamentals with many property types able to withstand rental increases that keep up with existing higher global inflation rates. Also, there is good demand for these and no oversupply.
“We believe global listed real estate is currently fairly valued — and our estimate is that on average, the sector trades at about a 10% discount to net asset value of the direct market,” Theodore Freysen, senior global investment analyst at Catalyst Fund Managers, told Business Day.
Freysen said the discount to private market values is higher in less favoured subsectors, like offices which can trade at about 40% discount. Others, like the net lease sector, where tenants pay rent and other building operating expenses, are trading at about a 25% premium to private market values.
He said the listed market incorporates investor expectations for now and the future — while there is a significant lag in the pricing of the direct market, which has experienced a lack of liquidity and transactions.
“In our opinion, valuers in the direct market have not fully incorporated the current market environment conditions in their values,” he said.
Marco Colantonio, co-portfolio manager for the Nedgroup Investments Global Property Fund, says listed Reits are trading at about a 20% discount to unlevered asset values.
Rob Johnson, head of investments at Nedgroup Investments said direct property prices change far slower than Reit share prices.
For example, a property held directly for investment purposes is only valued independently once a quarter or when sold. Listed Reit investors, however, determine what they perceive the value of the underlying building to be.
Johnson said the reasons for investing in a building were twofold: the capital appreciation over time and rental income.
Rental income is tangible and generally increases over time. The price of a building may increase or decrease depending on what a buyer is willing to pay for the rental income, said Johnson.
“The global Reit market has been oversold in 2022 relative to the broader equity market. This provides an opportunity to buy into high quality rental income streams that should persist through any economic environment, due to the need for specific property types,” said Johnson.
Johnson said certain areas of the market will be more cyclical as demand diminishes in a recessionary environment, and selective allocations within the global index, whether by region or by property type, will become important.
He said their investment team prefers property types rather than regions, adding that there are three investment opportunities demonstrating an attractive potential for higher rental income.
These include beds, meds and sheds, and currently comprise more than 60% of the Nedgroup Investments Global Property Fund.
Housing shortage
Johnson said beds are in response to the global housing shortage and this includes residential properties, hotels and student housing. Big players in this sector include US-based owner of single-family homes, Invitation Homes, and Unite Students, owner of student residential accommodation in 23 UK cities.
With the ageing global population, the meds sector is meeting demand for senior housing, life science buildings, medical offices and clinics. Companies like Alexandria, a life science office owner based mainly on the east coast of the US and Assura, the owner/manager of doctors' surgeries and medical clinics in the UK, largely rented out by the NHS are active in this space.
He said sheds is leveraging the growth in e-commerce, through logistics/warehouses, data centres and self-storage. New York Stock Exchange-listed Reit and the world’s largest logistics owner, Prologis has the biggest position in the fund and is a significant landlord to Amazon mega distribution centres. The Big Yellow Company is the largest self-storage company in the UK, benefiting from small business growth and domestic decluttering from the move to hybrid workplaces, said Johnson.
Freysen said over the past few years, modern logistics and warehouse facilities, residential (specifically single-family rental housing) and lab space have been in high demand as these sectors have experienced favourable supply and demand fundamentals.
He said while the SA listed Reit sector is dominated by traditional subsectors of industrial, retail and office, globally there are many niche subsectors including manufactured housing, single family housing, gaming, net lease, lab space, cell towers, health care and data centres.
Catalyst Fund Managers believe some subsectors like US residential, modern logistics and warehouses are favourably valued while data centres and European offices do not look attractive.
Freysen said global Reits (in rand) have outperformed the SA Listed Property Index over the past 3-5 years on an annualised basis. On a 3-year annualised basis, global Reits recorded 0.23% compared to a fall of 6.10% for SA Listed Property, and on a 5-year annualised basis, global Reits recorded 5.73% while SA Listed Property lost 7.46%.
The change to regulation 28 limitations in SA allows for increased exposure to global companies from 30% to 45%, and the addition of global Reits gives investors access to geographic and sectoral diversification, even while investing in a single asset class.
“Due to the contractual nature of real estate rental revenue, we generally have good visibility on the earnings outlook for global listed real estate companies, which is not necessarily the case with general equities at the moment,” said Freysen.
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