Lisa Kaufman

The relative underperformance of global real estate investment trusts (GREITs) since the start of the pandemic may be poised to change, with a strong recovery in fundamentals and supportive financial conditions creating a strong set-up for returns, according to the head of LaSalle Investment Management Securities, Lisa Kaufman.

Ms Kaufman said there were legitimate reasons for the underperformance of GREITs, including COVID-19 uniquely impacting gathering places and the work from home phenomenon; however those impacts are rapidly moving to the rearview and REIT earnings growth is poised to accelerate while broader equity earnings growth slows.

“It’s unusual for early cycle fundamentals to coincide with late cycle cost of capital but we have those two dynamics happening now and it’s driving good flows into real estate,” she said.

Ms Kaufman said the Baltimore-based asset manager holds this view despite the recent rise in global interest rates.

“Real estate is a long-term investment and when we look at interest rates, investors need to look at long-term rates. We’re less concerned with short-term interest rates and the Federal Reserve raising rates. If long-term rates were rising sharply, credit spreads were exploding and/or inflation expectations collapsing, it would be a different story, but that’s not happening,” she said.

“The recent sell-off notwithstanding, there is a lot of historical data that shows that GREITs can perform quite well in a rising rate environment. In fact, negative returns have been most often associated with falling interest rates due to a negative economic growth shock.”

Further buoying the strong set of economic fundamentals for the GREIT sector is the surge in mergers and acquisitions activity (M&A). 2021 was a record year for US REIT M&A volume, with more than $US100 billion transacted.

“The combination of strong cash flow growth expectations and supportive financial conditions are collectively driving flows into real estate. The world is awash with capital, and there are unprecedented levels of private equity capital looking for a home in real estate.

“Furthermore, the scale that comes with large portfolios, especially in more operationally intensive sectors, is increasingly appreciated by private equity.

“We expect M&A to continue both in the US and around the world and to be an additional a catalyst for the GREIT sector in 2022. We’re expecting an average annual return of over 10 per cent a year  over the next three years, which is above the long-term average returns generated by the sector,” said Ms Kaufman.

The SGH LaSalle Concentrated Global Property Fund is an actively managed portfolio that invests primarily in GREITs and real estate operating companies. The fund seeks to provide total return through long-term capital appreciation and rental income. It provides investors with exposure to attributes of property ownership along with liquidity offered by tradable securities.

LaSalle Investment Management Securities – which has approximately $US4.4 billion funds under management – partners with Melbourne-based SG Hiscock & Company in exclusively distributing the Fund to Australia investors.

The post Strong fundamentals see global REITs primed for growth appeared first on AdviserVoice.

Lisa Kaufman

Despite a significant downdraft since the onset of the worldwide COVID-19 pandemic, global real estate securities represent good value with most companies better positioned now than in the Global Financial Crisis, according to LaSalle Securities chief executive and portfolio manager, Lisa Kaufman.

Global real estate securities such as Real Estate Investment Trusts (REITs), are priced competitively compared to alternatives such as equities and bonds and are currently trading at a discount to NAV, well below the long-term average premium.

Ms Kaufman believes most global listed real estate companies are entering this recession in far better financial health than in 2008, which is mitigating heavier losses.

“Companies have reacted differently this time; in the GFC, many were caught flat-footed, but most companies moved quickly when the markets seized up this time around. Global central banks moved swiftly too and did so with a bazooka.”

“As the markets began the sharp sell-off in late February, many Listed entities accessed their lines of credit, suspended non-essential capital expenditures, and some or suspended or cut dividends. In normal times, announcements like these would be scary, but given the level of uncertainty surrounding the pandemic and lockdowns, the measures were prudent,” she said.

Better performing global real estate sectors are data centre REITs and cell tower REITs which have benefitted from the substantial increase in work and schooling from home.

Relative winners from a country perspective are Hong Kong (down 11 per cent) and Singapore (down 14.3 per cent), with Canada and Australia the laggards (down 31 per cent and 32 per cent respectively). The latter two economies are tied to natural resources and the real estate indices in both countries have heavy weightings to retail, both of which have contributed to the sharp correction.

According to Ms Kaufman, some of this market movement has created mispricing and, in the process, alpha opportunities for global investors who can invest across geographies and sectors.

“Real corporate bond rates have made a remarkable recovery and are now below pre COVID levels but real estate is being held back by the fact the virus is disrupting how people can use physical space. This pandemic is a particular threat to real estate, and markets are moving on headlines with science in the driver’s seat,” she said.

At a property sector level, Ms Kaufman said lodging and resorts typically underperform in recessions, and social gathering and travel restrictions have further exacerbated price declines. Similarly, forecasts for the retail sub-sector which were already weak have been reduced further, with net operating income not expected to return to 2019 levels until 2024.

LaSalle also expects the office sector to be impacted in the short and long-term by the pandemic.

“Office space will have to contend with the typical fall-off in leasing from the recession as well as overhang from flexible office providers who had aggressively expanded in the years leading up to the COVID crisis “.

“We’re in the midst of this working from home experiment, and we expect some lasting impact as more people work from home more often over the, long term. As such, we’re anticipating a loss of pricing power in the office sector that leads to significant market rent declines, particularly in the gateway markets where the REITS tend to be concentrated,” said Ms Kaufman.LaSalle Investment Management Securities – which has approximately $US5.5 billion funds under management – has partnered with SG Hiscock & Company to distribute the SGH LaSalle Concentrated Global Property Fund in the Australian market since 2003.
The fund is also part of the Melbourne-based boutique manager’s recently launched Partnership Program, which sees global funds leveraging SG Hiscock’s local dealer group and independent financial adviser network.
SG Hiscock & Company managing director, Stephen Hiscock, said the COVID-19 recovery period will demand a higher degree of caution with markets and valuations, with continuing lockdowns and the US presidential race fuelling further uncertainty.

“The heightened uncertainty has increased the need for highly selective active management. At the beginning of the crisis, there were real fears about liquidity in the market but central banks stepped in to placate. After capital markets shut down early on, they’re wide open today.
“Together with LaSalle, we believe global REITs represent an attractive opportunity in this environment, with the fund’s strategy providing Australian investors with the ability to access LaSalle’s top 10-20 best ideas globally through a truly active high conviction portfolio,” he said.

The post Opportunities in global real estate market strengthen after recent sell-off appeared first on AdviserVoice.