Real estate investments can be attractive to investors as they hunt for yield in a low interest rate environment.
QE in key markets is supporting real estate investment, which is expected to continue to attract investor interest this year even though the market fears interest rate tightening.
“Despite property yields currently being at very low levels, spreads over long-term sovereign bond yields are still substantial in most markets due to extremely low interest rates. This is particularly true in Europe,” said Sandip Bhalsod, global real estate analyst at Aviva Investors.
“Rising bond yields will put upward pressure on property yields in the US and some Asian markets over a five-year period.
“But the gradual likely pace of interest rate rises, along with solid rental growth, should prevent a sharp increase in US yields in 2016.”
A big risk for the sector is a potential credit crisis in China, which could lead to a strong downward pressure on the housing market and impact prices in Tier cities. “Contagion would likely spread to the bond market where highly-leveraged developers heighten the risk of widespread defaults,” he added.
The sector is also at a crossroads where returns based on capital growth are starting to give way to returns driven by income.
Against this backdrop, Fund Selector Asia compares the Henderson Horizon Global Property Equities Fund with Janus Global Real Estate Fund.
Luke Ng, senior VP of research at FE Advisory, provides a comnparative analysis.
Investment strategy
Allocations to property funds are good as satellite investments because they deliver diversification in a fund portfolio, Ng said.
Both the Henderson and Janus funds have been in the market for more than ten years. The Henderson fund co-managers are Guy Barnard and Tim Gibson. As active managers, their portfolio tends to deviate from the benchmark, the FTSE EPRA/NAREIT Developed Index.
“They prefer to hold a concentrated portfolio of around 60 to 70 (now around 50) high-conviction stocks, and pay strong attention to picking stocks with management quality, good valuation, the possible sources of return, as well as the difference between the share price movement and the price of the underlying properties owned,” Ng said.
However, the team also takes a top-down approach to help manage the more unwieldy risks such as those from currency movements or political events.
Henderson used to outsource the management responsibility of the North American sleeve to Harrison Street Advisors in Chicago, Ng said. However, as the firm grew globally in 2015, responsibility was brought back in-house. Bob Thomas was hired to lead the US property equities team with two affiliates working alongside him. The team assumed responsibility in November 2015.
“Despite the changes in team structure of Henderson, the investment philosophy and process are pretty much the same,” Ng said.
“Henderson considers real estate a local business that requires local professionals on the ground. Bringing all investment arm in-house should help connect the regional teams in a better way going forward.”
Turning to the Janus fund, Patrick Brophy aims to grow investment capital by investing in global real estate companies. The fund uses FTSE EPRA/NAREIT Global Index as the benchmark, and that marks a potential difference from Henderson, Ng said.
“The investment universe could be covering listed real estate companies in emerging markets, even though current exposure is around 5%, lower than the benchmark index.”
Brophy is also an active manager, but he tends to hold a less concentrated portfolio of around 100 stocks, Ng said.
“While both funds have no restriction on cap size, Janus tends to have a stronger bias towards small and mid-cap companies. He favours companies with prime holdings in strategic locations, quality management teams and solid financials.”
“Both Henderson and Janus managers attempt to add value via both capital appreciation and rental income. Worthwhile to note — they consider that in 2016, we will no longer see strong capital growth in the sector. Return income and rental growth will become the key drivers for future returns.”
Geographic exposure
| Region | Henderson | Janus |
| North America | 55.8% | 50.5% |
| Japan | 11.6% | 8.4% |
| Europe ex-UK | 10% | 9.1% |
| Pacific Basin | 8.7% | 9.3% |
| UK | 8.1% | 5.7% |
| Australasia | 5.1% | 5.1% |
| International | 0.7% | 6.5% |
| Americas | — | 2.2% |
