AREITs face greater risks with limited stock on the market: Lonsec

Managed funds that invest in Australian listed property trusts have performed strongly over the past five years, but investment researcher Lonsec warns they face risks due to the limited number of stocks in the sector.

Recent corporate transactions such as the acquisition of Commonwealth Property Office Fund by DEXUS Property Group and Canada Pension Plan Investment Board, and Frasers Amethyst’s takeover of Australand Property Group have exacerbated the problem for investors, Lonsec senior investment analyst Peter Green said.

“It’s not a new problem. It’s been around since after the GFC when Centro and others dropped out but if anything, it has got worse because we’ve had a lot of corporate transactions,” Green told Property Observer.

The 10 largest property stocks account for about 90% of the market capitalisation of the S&P/ASX200 property index. That means funds take a large amount of stock risk when investing in the sector, said Green, who was the principal author of Lonsec’s 2014 A-REIT Sector Review.

The recent split of Westfield into Scentre Group and Westfield Corporation has improved the situation. Westfield used to account for 26% of the index, but Scentre makes up around 18-19% of the index, Green said.

Passively managed property funds that track the index, as well as actively managed funds that invested only in larger listed property trusts were most constrained by a lack of choice, Green said.

“For those managers that can go outside the top 15 and go to the smaller cap spectrum or utilities companies or even international [listed property], they do potentially have an advantage in this market,” Green said.

Despite the risks, fund managers that actively invested in listed property companies and Australian real estate investment trusts performed strongly in the year to June 30, 2014, Lonsec’s sector review found. The managers that the researcher examined achieved returns of 12.7% over the year to June and 15.4% annually over five years. The funds reviewed also distributed more than 5% a year in income to investors.

Green said while investors should be aware of the risks the managed funds were taking, it did not appear that there were structural issues with the property companies that the funds invested in.

“At this stage a lot have done balance sheet repair, board regeneration and exited offshore markets,” he said.