Taking the offshore plunge on global Reits
It’s not too late for investors to embrace the universe of global listed property, especially as local stocks languish
It is high time for SA property investors to include offshore companies in their portfolios if they want a fighting chance at decent returns.
Offshore listed property, widely known as global real estate investment trusts (Reits), was one of the best money-spinning sectors in the world last year. It delivered a stellar 21% average total return in rand terms (as measured by the GPR 250 Reit index).
That is streets ahead of the average 2% that investors who were exposed to JSE-listed property stocks last year had to be satisfied with. What’s more, last year’s disappointing performance followed a colossal 25% drop in SA property in 2018.
Global Reits also comfortably outperformed the all share index’s (Alsi) 12% gain over one year.
Kundayi Munzara, director of property asset manager Sesfikile Capital, ascribes last year’s offshore Reit rally to strong growth in company earnings in various global regions on the back of a healthy supply/demand balance.
Even UK Reits recovered following a two-year Brexit-induced price slump, while demand for US-listed property stocks was supported by a strong economy, a 50-year-low unemployment rate and three interest rate cuts over the year. "In a low interest rate climate, defensive, yield-play sectors like property will typically outperform," says Munzara.
But the global Reit sector is no flash in the pan. Over five years, the sector has delivered a 68% total return in rand versus the 34% and 6% that investors would have earned respectively from the SA listed property index (Sapy) and the Alsi.
The performance divergence becomes even more stark over 10 years: global Reits are in fact the third-best performing sector in the world after the Nasdaq and the S&P 500, with a total rand return of 413%.
That compares to the Sapy’s 180% and the Alsi’s 178% over the same time.
Garreth Elston, chief investment officer of Cape Town-based Reitway Global, says unfortunately South Africans have lost out on some spectacular gains as they haven’t had enough exposure to global Reits over the past few years.
The key question now is whether SA investors have completely missed the boat.
It doesn’t seem so. The general view is that while returns are likely to slow somewhat this year, global Reits are not overvalued.
In fact, Elston expects global Reits to "substantially" outperform their SA counterparts for at least the next two years, given the stronger economic growth outlook of major offshore markets versus that of SA.
Munzara agrees that it still makes sense to be overexposed to global Reits given SA’s stagnating economy, which is likely to continue to place pressure on earnings and dividend growth among SA firms.
Unlike global Reits, many local property counters have only recently started to clean up their balance sheets by removing nonrecurring income from their payouts, which will place further pressure on dividend growth in the short term.
Munzara expects SA-focused Reits to deliver average dividend growth of less than 3% (in rand) this year compared with 5% or more (in US dollars) for global Reits.
It’s not just better returns that are on offer.
Catalyst Fund Managers senior investment analyst Tiffany Jones says the sector gives local investors the chance to diversify their portfolios across countries and subsectors, and not just the usual mix of shopping centres, offices and industrial buildings typically available via JSE-listed property stocks.
Jones notes that there are more than 400 individual property companies listed across world markets that offer exposure to around 20 different subsectors, some of which SA investors may not be familiar with.
The latter include specialist data storage centres, research laboratories for the pharmaceutical and agtech (farming-related technology products and services) sectors, transport infrastructure, hospitals and retirement housing.
The sheer size of the global Reit market makes stock picking a daunting task.
An easier way to access offshore real estate markets is through global Reit-focused unit trust funds — of which there are nearly 20 available to SA investors, up from only a handful five years ago.
Though rand-denominated, these funds are 100% exposed to offshore real estate markets. So investors can profit from the performance of global Reits as well as any potential currency weakness without using their offshore allowance.
So in which countries and subsectors are SA fund managers currently stashing their cash?
Munzara says they like specialist residential funds in the US, particularly those that are exposed to standalone "single-family" homes catering to millennials and young families who no longer want to live in smaller apartments. "There’s huge growth in demand for this type of rental property in the US," he says.
Munzara also expects further demand growth in the apartment sector in Europe; self-storage in Canada, the UK and Europe; as well as logistics (warehouse and distribution centres) in Europe and Australia.
His current top stock picks are Invitation Homes, the largest single-family residential fund in the US; Goodman Group, an Australia-based logistics property owner and developer; and WDP, a pan-European logistics group.
Jones, who helps manage the Catalyst Global Real Estate Prescient Feeder Fund, SA’s best-performing global real estate unit trust fund over five years, has a bottom-up stock selection approach.
"We first look at the quality of an individual company’s underlying assets and management team, the sustainability of its earnings and strength of its balance sheet before we consider geographic or sectoral exposure," she says.
Like most other rand-denominated global property fund managers, Jones is overweight in the US, the world’s largest and most developed real estate market.
The US also offers investors the biggest variety of subsectors to choose from.
Tighter debt lending standards and increased labour and construction costs in the US mean it is harder to fund new developments.
"That keeps new supply in check which, coupled with a strong economy, is supportive of continued earnings growth among US Reits," says Jones.
But she remains wary of the UK amid ongoing Brexit uncertainty and is staying away from shopping centre owners in particular, given the UK’s tough retail operating environment.
Jones is also underweight in Japan. "Valuations of Japanese Reits are stretched," she warns.
With property sectors, Jones prefers niche residential offerings and technology-driven property stocks in the US.
She also likes funds that own nontraditional office space such as Canada’s Allied Properties Reit. The latter caters to the region’s burgeoning services, tech and media industries.
Her top picks include data storage facilities owner Equinix; Alexandria Real Estate, which rents out space to the pharmaceutical and agtech sectors; and Invitation Homes.
Elston favours the logistics, residential and data centre sectors. His top picks include US-listed Prologis, one of the largest logistics players in the world; LEG Immobilien, a German residential fund; Equinix; and Americold Realty, a US-based cold storage warehouse Reit.
But like any other offshore investment, global Reits are not risk-free. Elston cautions: "Foreign currency and foreign exchange risk can be an issue, especially if the rand should strengthen substantially."