Performance Review 2006
John Snowden: "Global property markets performed well in 2006. Global economic growth remained robust and the Japanese economy continued to improve. High oil prices and rising US interest rates threatened to undermine confidence in the first half, but oil prices fell substantially and US interest rates were not increased further in the second half.
US property markets performed strongly over the year driven by expectations that the Federal Reserve was near the end of its tightening cycle. Merger and acquisition (M&A) activity drove the market. Private equity firm Blackstone’s US$ 39bn offer to acquire Equity Office Properties was potentially one of the world’s largest real estate investment trust (REIT) buyouts. The housing sector slowed considerably which could impact retail sales and the retail trust sector going forward.
European property markets were also robust on continuing economic strength. Spain performed particularly well driven by positive fundamentals in the property sector and the UK benefited from investor anticipation of the introduction of REIT legislation in early 2007.
Asian markets were also stronger over the year as economies remained robust and liquidity abundant. The Japanese economy and property market continued to improve. There were some concerns in China, where the government introduced austerity measures to slow down lending for investment in fixed assets."
Performance Review 2007
John Snowden: "Global listed property markets performed poorly in 2007 as the subprime debacle in the US produced a global credit crunch and raised concerns about a slowdown in the global economy. Over the twelve months to 31 December 2007 the FTSE EPRA/NAREIT Global Index fell by 7.0% in US dollar terms.
US property markets declined over the year as the housing market entered a significant slump in activity. The escalation of the subprime debacle further undermined confidence in the sector and the ensuing credit crunch reduced the ability of property companies to source capital. European markets were also subdued as they were influenced by the US and concerns about the global economy.
Asian markets outperformed significantly as economies remained robust and property fundamental were supportive. Hong Kong was positively impacted by cuts in US interest rates and expectations of further declines in 2008. The Japanese property market also showed continuing signs of improvement despite a mixed economy.
Performance
Performance was positively impacted by a number of Hong Kong-listed companies: Kerry Properties (Diversified), Agile Property (Residential) and China Overseas Land (Diversified) all rose strongly on positive sentiment towards stocks exposed to China and falling US interest rates. On the negative side, Centro Properties (Australia: Retail) underperformed as it announced that it was unable to refinance debt amid the global credit crunch, and Terrace Hill Group, a small-cap UK property investment and development company, was sold-off with the UK real estate sector despite the company’s ability to create value in a declining market."
Performance Review 2008
John Snowden: "Global listed property markets fell substantially over 2008 with global equity markets as the credit crunch caused a financial crisis and a significant slowdown in economic growth.
The US property market remained under pressure as foreclosures rose steeply and transaction activity collapsed. The continuing credit crunch made it very difficult for companies to source funding. European markets were also weak as economies deteriorated and property prices fell. Real estate asset values declined dramatically as credit dried up and equity investors stayed away from the asset class, making it difficult to attribute ‘true value’ to real estate assets. Asian property companies suffered from very difficult credit conditions, slowing economic growth and falling property prices. In the first half, markets were focused on inflationary concerns as the oil price increased steeply, but interest rates were cut aggressively in the second half as the deflationary impact of the financial crisis became evident. Governments around the world responded by announcing significant stimulus packages to support domestic demand.
Performance (data refers to the period from 31/12/2007 to 31/08/2008)
Performance was positively impacted by US REITs Vornado Realty (Office) and Simon Property (Retail). Both rose after delivering strong results and on expectations of fundamental improvement in the US property sector following a series of interest rate cuts. On the negative side, Hong Kong developer Kerry Properties fell significantly as it reported declining profits and Agile Property was unhelpful as the Chinese property market deteriorated significantly."
Performance Review 2009
John Snowden (till end of Feb 2009) / Andrew Nicholas and Stuart Martin (from March 2009):
"Global listed property markets rose substantially over 2009 with global equity markets as credit conditions eased and the global economy responded to the stimulus measures announced in 2008.Markets suffered during the first couple of months of the year as investors feared a very substantial economic slowdown. However, as credit conditions eased listed property markets rose with global equity markets. The US property market showed some signs of recovery after suffering over a number of years. The Chinese property market recovered strongly with robust price rises boosted by high levels of bank lending. Positive sentiment towards China helped to sustain a strong recovery in the Hong Kong listed property sector.
Performance
Performance was boosted by US industrial REIT Prologis which rose as investors responded positively to improving levels of activity in the US economy, and diversified French REIT Unibail-Rodamco which performed strongly as it announced better-than-expected earnings. On the negative side, Alexandria Real Estate (US: Office) underperformed as the company scaled back developments, reduced its dividend and diluted earnings with two large capital raisings, and Nippon Building Fund (Japan: Office) was weak as the Japanese economy remained subdued."
Performance Review 2010
Andrew Nicholas and Stuart Martin
: "Global markets continued their recovery phase through 2010 as credit conditions further improved. Notwithstanding this there have been periods of uncertainty that has resulted in market weakness. This has predominantly been centred around the sovereign debt risks in Europe – Ireland, Greece, Spain and Portugal being the central focus.Despite these periods of weakness the global real estate markets are up 24% over the 12 Months to December (Dec 2010). Factors helping this have been the gradual recovery in the US REIT space and the strong performance of the Asian investment markets. Hong Kong and Singapore in particular have seen strong tenant demand for space against a backdrop of low supply resulting in solid rental growth. Japanese REITs benefited from a stimulus package introduced by the Bank of Japan which would see the Bank buy shares in J-REITs. In Europe the Scandinavian and German economies grew strongly and the real estate sectors were direct beneficiaries of this. In the UK the strength of the London property market appears to have been borne out with a number of REITs launching office development programs across the City and West End to accommodate the strong demand for space. In France Unibail Rodamco, one of Europe’s largest REITs, announced a EUR20 per share return of capital which proved very popular with the market.
Performance
The Unibail Rodamco’s EUR20 per share capital return contributed to fund performance for the 12 months to December 2010. With the US in recovery our position in Simon Group, the US’s largest retail owner, proved as it continued to perform well. During the year we added Brazil’s largest mall owner BR Malls which performed strongly on the back of continued growth in Brazil’s economy. Hong Kong Land, the leading owner developer of Hong Kong commercial and residential space, benefited from the strong leasing demand in Hong Kong.
In contrast, Brookfield Senior Living detracted from performance as it underperformed due to discretionary nature of the sector and its slower recovery relative to broader commercial real estate. CoreSite, a US data provider, underperformed as the market became concerned over potential for speculative supply to weakening market fundamentals."
Performance since 2006
John Snowden (till end of Feb 2009) / Andrew Nicholas and Stuart Martin (from March 2009): "The Fund launched prior to the global financial crisis during a period of significant liquidity and an appetite for high leverage. With liquidity becoming almost nonexistent for a significant period through 2007/08 clearing prices for assets became uncertain and global property securities were materially impacted as the market anticipated new values.
This resulted in greater focus on gearing and interest coverage ratios and more defensive portfolio construction.
While the recovery in liquidity and corresponding recovery in global real estate equity markets has been welcome the focus on well constructed balance sheets, quality income streams and management teams with proven track record remains a key focus of our portfolio construction."
Investment Process and Strategy – How does the Fund Manager Invest?
Andrew Nicholas and Stuart Martin: "The First State Global Property Securities Fund will follow an active investment management style. Its objective is to achieve long term capital growth and make regular income distributions by investing in a broad selection of liquid property investments from around the world.
There are no absolute or relative regional biases in any of our global property securities portfolios. We are mindful of the country allocation of the benchmark; however our intention is to invest in the best securities on a global basis rather than to attempt to exactly replicate the regional structure of any index.
Adding the Colliers direct property global research to our processes is expected to dramatically enhance our property research capability. This alliance gives us access to real-time proprietary information on every major property market globally, allowing us to identify pricing anomalies in the listed market quickly and efficiently.
Other key differentiating factors include:
• We are a stock selector with no sectoral biases;
• 4 year track record in global property securities investing; and
• Highly rated team of senior investment professionals.
Investment style
We believe that markets frequently fail to price real estate securities efficiently. Opportunities to add value arise when discrepancies develop between market prices and our own views of absolute values within our universe. As such, our active investment style looks for undervalued securities using a discounted cash flow analysis as a base. We then perform analysis on individual REITs (trusts) and companies after satisfying a number of screening criteria outlined below.
Our aim is to maximise alpha to investors through superior capital and income returns from investment in a broad selection of liquid global property investments. Performance after fees is to exceed the total return of the benchmark over rolling three-year periods. Most of the performance is attributable to individual security selection.
While we accept that style analysis may provide a useful ‘snapshot’ of our portfolio, we don’t believe in style analysis as a way of depicting how we manage money. This sort of analysis doesn’t encapsulate what we do.
Stock Selection Process
Our stock selection methodology begins with bottom-up research which is undertaken on securities that meet our risk controls. Our process assesses the present value of future cash flows based on detailed individual stock modelling. We model the underlying assets and the cash they are expected to produce over a five year time period. This is discounted by the Capital Asset Pricing Model (CAPM) discount rate. This is then capitalised using a terminal growth rate that reverts to mean GDP growth over a period.
The NPV is then compared with the existing price to derive the excess return (alpha). This enables us to rank the stocks quantitatively. However the interactive nature of the process may still reveal qualitative or other valuation metrics that can qualify the alpha rating.
We then proceed to a relative valuation assessment, comparing the security’s alpha with those of its peers.
Stocks outside the investment universe
The performance benchmark’s country allocation is used as a base for our portfolio construction. Our investment disciplines allow us to invest a maximum of 10% of the market capitalisation of the fund securities outside of this universe. This acknowledges our philosophy: the quality of a company or trust is not necessarily related to its inclusion (or otherwise) in a given index. Accordingly, having the ability to invest in quality companies that are not represented in an index is important in ensuring that our portfolios are suitably diversified of only quality companies and trusts."
Investment Outlook
Andrew Nicholas and Stuart Martin: "For all the unease about overheating and policy risks in the near term, there are some sources of comfort for property investors. Indeed, while they have spurted higher, prices, particularly in Hong Kong and Singapore, have not seen the vertiginous ascent recorded prior to the Asian crisis in the late 1990s. Rental yields have fallen sharply in China, suggesting possible speculative froth and looking ahead, investors clearly have to brace for some potential policy-induced cooling measures to avoid the risk of a significant bubble developing. We believe that the medium-to-long term outlook for Asian property markets remains promising.
We remain defensively positioned and are actively seeking to invest in REITs with sustainable dividend yields. In Europe, we continue to seek quality stocks which are unlikely to be impacted by the austerity measures being implemented across the Continent and the UK. We believe that the sector is fairly priced with some pockets of attractive valuation."
