Stafford Thomas

Investors in SA commercial property funds should strongly consider switching into foreign property funds, advises Simon Pierce, CEO of Marriott Asset Management Given Marriott’s track record of steering investors in the right direction it is advice to be taken seriously.

Contributing especially to its credit is something asset management companies seldom do: protect investors from pouring money into their unit trusts at the wrong time. Marriott did just that in 2005 when it closed its International Real Estate Fund (Iref) to new business.

Marriott’s timing proved astute, just as it was at first when it launched US dollar- denominated Iref in February 2001. The Durban-based unit of Old Mutual Investment Group SA added to its credibility by reopening the fund in mid-2009, after one of the most devastating commercial property bear markets ever had run its course.

At the time of Iref’s closure, yields on commercial property in the US, Europe, the UK and other major developed markets had fallen steeply. In the US, for example, yields on real estate investment trusts (Reits), which are similar to SA property unit trusts, had fallen from 7,5% in 2001 to below 4%, their lowest in 30 years.

Strong income distribution growth added fuel to a property bull market that had enabled Iref to produce a total return (capital plus income) of almost 200% in dollar terms between 2001 and early 2007. Then came the crash. On Reits, average income distributions halved and yields shot up, peaking at 8,5% at the end of 2008, the highest in 20 years.

Iref investors who had not heeded Marriott’s advice saw the value of their investment value slump 65% in rand terms between early 2007 and early 2009. Fortunately most had listened.

“About 90% of investors [in Iref] followed our advice when we closed it and moved into other funds,” says Pierce. Since Iref’s reopening a lot of investors have moved back in, he adds, and Iref’s unit price has now lifted about 20% in rand terms and 25% in dollar terms. Pierce believes it still presents an attractive investment opportunity.

“Value has returned to foreign property markets,” says Pierce. Iref’’s yield of about 5% must be seen against the background of very low interest rates in developed markets, he says.

Though SA property funds yield about 8%, Pierce believes that this is too low to justify the risk. He explains that property cycles run for up to 10 years and are divided into periods of poor returns and ones of high returns. The SA property market, he believes, is on the brink of a period of poor returns.

SA property owners, he says, face steeply rising costs at a time when rental escalations will be muted.

“It’s a tenant market,” stresses Pierce. In the retail sector, in particular, there has been excessive development, and he believes the market has yet to come to terms with this.

Marriott is backing this view in its SA Property Equity Fund, which has almost the maximum permitted 50% of assets in cash and 30% of its property investments hedged against a market fall.

By contrast Iref is almost fully invested, with holdings spread across the US and Canada (55% of assets), Europe (14%), the UK (14%), Australia (6%) and other Asian countries (4%).

Marriott’s positive view on foreign property is shared by many of the world’s giant financial institutions. European insurer Allianz, for example, has invested à1,4bn in commercial property since the start of 2010.

For investors seeking offshore exposure offering a good yield and moderate risk, Iref is well worth considering. Investment can be made using offshore investment allowances or through a rand-denominated feeder fund.

Source: Financial Mail