Harbour Island Tampa Florida

AMP Capital’s Global Direct Property Fund (GDPF) has purchased a core office building in Tampa, Florida for US$32 million as well as an adjacent land site for US$2.5 million. 

This acquisition follows the recent purchase of a Boston office property for US$17.6 million, announced last month. 

With 180,000 square feet over 12 stories, the Two Harbour Place office building is located at the southern end of the Tampa CBD on prestigious Harbour Island, a high-end master-planned development.  The A grade property was significantly renovated in 2006 and is currently 91 per cent occupied with multiple quality tenants. 

AMP Capital Fund Manager Tim Fallet said the acquisition has been made at a good time in the cycle, in a secondary market poised for growth and with the cost of debt at historical lows. 

“Tampa’s three million square metres of institutional grade office stock ranks on par with Brisbane, the third largest office market in Australia. It’s a market poised for a strong recovery with average annual rental growth in the Tampa CBD projected to be 4.9 per cent through 2017, while supply is projected to grow by a scant 0.4 per cent,” Mr Fallet said. 

“This is an attractive investment as we are able to invest in select secondary US office markets which offer a much higher yield than similar quality properties in core US markets like New York and Washington.” 

The adjacent 5,100 square metre land parcel is already zoned for 237 multifamily units.  AMP Capital will implement a strategy to both unlock value in the office building and improve the development opportunity for the land parcel. 

“We’ve already had an incredible amount of interest in the residential site from multifamily developers which reinforces our belief in the approach we’re taking.  We’re confident this acquisition will provide our investors with an excellent investment outcome,” Mr Fallet said. 

The AMP Capital Global Direct Property Fund provides Australian superannuation funds with access to core and core plus direct property investment opportunities in large, liquid and transparent offshore markets.  The fund invests in a strategic mix of international direct property assets across all the property sectors.

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Global property outperforms global equities

Research house Lonsec said global listed property had outperformed the majority of major asset classes during 2012, driven largely by investors seeking yield and a general preference for defensive sectors.

The Lonsec Global Property Securities Fund Sector Review said while fund performance has been impressive in an absolute sense, relative performance has been somewhat disappointing. Both major property securities indices delivered returns in excess of 25% over the year, having rebounded from the lows experienced during the global financial crisis; however the majority of managers underperformed their respective benchmark indices over the past year.

“The sector has been the beneficiary of a generally low growth environment, with investors seeking out higher yielding investments from defensive sectors. Global property securities outperformed global equities by 8.6% over the year to November 2012, and by 8.7% p.a. over a three-year period. Both major property securities indices delivered strong returns over the year, having now rebounded strongly from the lows experienced during the global financial crisis,” said Andrew Coutts, Senior Investment Analyst.

“Like-for-like performance comparison between funds remains difficult, since a number of funds are benchmarked to different indices” he said.
The Lonsec Review found overall portfolios were generally defensively positioned, with managers tending to favour large cap, high quality names. It identified that this bias in portfolios is also reflective of the significant divide that has opened up between the major REITs and their smaller counterparts.

“In general, larger REIT players are thought to be better positioned from a risk perspective relative to their smaller counterparts. This is due to better access to funding at more attractive pricing – with lenders having adopted more stringent lending criteria – and the tendency for high quality property to be more resilient in periods of economic difficulty.

“With macro uncertainty prevailing, fund managers were not taking material regional bets but instead focusing on stock selection. Many are ‘sticking to their knitting’ and focusing on bottom up research in the hope of achieving better relative results by being in the right companies rather than taking large bets on sectors or regions.” Mr Coutts concluded.

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The groundbreaking research was conducted by Russell Investments, the Asian Association for Investors in non-listed Real Estate Vehicles Limited (ANREV) and the Australian Institute of Superannuation Trustees (AIST) to gauge how Australian institutional investors view the opportunities and challenges associated with offshore real estate. Thirty-nine institutions and superannuation funds representing $360bn of funds under management participated in the inaugural survey, which will be carried out every two years.

“While Australian institutional investors have long discussed the need to capture global property opportunities, it seems a definite move offshore is now underway,” said Martin Lamb, director, Asia Pacific Real Estate Investment at Russell Investments.

Jeremy Stewardson, executive director of ANREV added: “We wanted to understand how investors were approaching this challenge and what support they needed to manage the transition. We think this study will enhance transparency and facilitate discussion.”

AIST CEO Fiona Reynolds said the study was particularly timely given debate about the asset allocation of Australian superannuation funds sparked by recent global sharemarket volatility. “International property will be increasingly on the radar of those funds looking for greater diversification,” she said.
 
Australian institutions currently allocate 9.7% of their investment portfolios to property, largely Australia-focused, and are intending to increase this to 10.5% in two years, the survey showed. When this increased property allocation is combined with the quickly-growing overall pool of superannuation capital, the survey suggests up to $40bn in new capital could be targeted for real estate in the next two years, a substantial sum for the circa $200bn Australian prime property market.

The research shows institutions are planning to increase the percentage of their property portfolios allocated to offshore investment from 2.3% to 3.2% in two years, a 34% increase. Many said they were planning overseas due diligence and said 2012 could be a watershed year.

The survey also uncovered some caution due to lingering bad memories from the global financial crisis (GFC), with investors now gravitating towards lower geared investments – 71% of those surveyed agreed they preferred funds with a gearing level of 50% or below.

Diversification, capacity constraints and access to high growth markets are the main drivers
Diversification was the overwelming reason why investors are looking offshore, with 71.8% of investors naming it as a motivation.

“Recent equity market instability has prompted investors to seek alternatives that reduce overall portfolio volatility and non-listed property has always been known for its low correlation with traditional asset classes,” said Mr Lamb.

Constraints in the local market was named by 46.2% of respondents as a key reason to invest offshore, while access to high growth markets came in third with 43.6%.

Interestingly, the strong Australian dollar was not a primary motivation for investing offshore, as many investors felt currency exchange rates were too volatile to form the basis for an investment strategy and preferred to think of the current favourable exchange rate as “an added sweetener”.

Concerns around due diligence and foreign tax drag
Even as institutions are beginning to embrace offshore property investing, there are many concerns to address.
 
“Over half of respondents (56.4%) named lack of knowledge of offshore property as a challenge, and suggested this could be improved by better education supported by industry groups, consultants and fund manangers,” said Ms Reynolds.

Foreign tax drag was also a deterrant for 43.6% of investors, with many particularly cautious about the US. They suggested the industry could do a better job of explaining tax efficient investment structures.

With trustee due diligence in the spotlight recently, investors are also worried they do not have the necessary internal resources to manage global real estate allocations, with 41% naming it as a concern.

“Australians are savvy property investors, and the survey shows they are clear-eyed about the opportunity to diversify their property holdings and bolster their offshore expertise. However there are still numerous challenges and we as an industry need to support them, to ensure we all negotiate this new territory prudently and look beyond our shores together,” Mr Lamb concluded.

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“We affirmed our five-star ratings, retaining our highest level of conviction in two funds managed by CBRE Clarion Securities (formerly ING Clarion Real Estate Securities) and AMP Capital Brookfield, who remain the standout managers in the rated peer group,” said S&P Fund Services analyst Peter Ward.

We upgraded two funds managed by RREEF due to our increased conviction since our previous rating review. The RREEF team is one of the best resourced in the rated peer group, with significant experience and expertise in both direct- and listed-property securities investment. Changes within the global portfolio-management team appear well considered and investment team stability and continuity of stock coverage have also improved,” added Mr Ward.

In addition, we downgraded three funds, two managed by Invesco and one by Resolution Capital from four stars to three stars. Our conviction in the Invesco funds’ ability to consistently exceed their performance objective has been tempered somewhat due to the manager’s relatively conservative portfolio positioning. This follows a period of underperformance over several years. For Resolution Capital, over the past 18 months there have been a number of significant team changes. In our view, despite our high regard for the senior portfolio managers, the team is unlikely to be at full strength for a period. Importantly, in both cases, we retain conviction that they can achieve their respective performance objectives.

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