First State sees major value in discounted global property ITs

Global real estate investment trusts trading on huge discounts are offering value but liquidity remains low, said the managers of First State’s Global Property Securities fund.

Andrew Nicholas, co-manager, said higher dividend income from Reits is driving the £31m fund to returns of 7%-10% per year.

He added he is tapping into the larger Reits with better liquidity but is retaining a defensive focus and will not buy a trust with gearing higher than 60%.

“Global real estate equity funds, while not immune to falls in capital values, provide their investors with a higher level of confidence of being able to get their capital back should they need it,” said Nicholas.

“These funds aim to capture consistent medium to longer-term returns through maintaining a focus on both rental income and underlying asset value.”

Stuart Martin, co-manager of the fund, believes Reits can also offer significant opportunities for geographic diversification.

“Traditionally, for many investors their exposure to property assets has been tied to their home or, in some cases, open-ended direct property funds, which, in the UK, tend to focus on domestic assets,” he said.

“The long-awaited introduction of UK Reits in January 2007, which removed double taxation on investment in publicly listed property companies, has played a significant role in highlighting key benefits of property securities, such as their liquidity and opportunity to diversify globally.”

The First State fund is overweight across emerging markets and Martin said he will continue to increase exposure in Brazil next year as residential development continues to grow.

The fund remains underweight across the developed world, including the US, Europe and Australia, based on the team’s macro view.