April 22, 2007

Invest in property without the bricks and mortar

Property stocks, unit trusts and Reits offer solid returns for far less cash outlay

By Lorna Tan, Finance Correspondent

MR ANG HAO YAO says it is important to identify the main property business of a company as this will impact its earnings volatility.

PRICES of luxury property have breached new highs and there are now growing signs that the boom may be cascading down to the mass market.

So it is no wonder many Singaporeans fear that they could be priced out of a fast-rising market.

But there is no reason that property should not be part of an investor's investment portfolio for more modest outlays.

After all, there are other ways to invest in the property market than buying a unit - and these alternatives provide investors with greater liquidity and other advantages such as sectoral and geographical diversity.

Alternatives to brick and mortar for retail investors include stocks, unit trusts and real estate investment trusts (Reits) - which invest in a portfolio of properties and get income from rents.

Mr Patrick Sumner, the head of property equities at Henderson Global Investors, says the average investor, in terms of age and risk appetite, can consider having up to 20 per cent of his portfolio in property, excluding his own home, and half of that allocation could be in property securities.

Benefits of investing in property securities

# Low correlation with other asset classes

THE main reason that financial experts consider property securities attractive is that they often follow a different cycle than other asset classes such as non-property equities and bonds.

This means that having some property exposure will help to diversify an investment portfolio.

'Studies demonstrate that global property securities increase portfolio returns while holding risk constant,' said Mr Todd Canter, the managing director of LaSalle Investment Management (Securities).

'Added returns without added risk - that's the power of diversification and that's the power of global property securities.'

Fundsupermart research manager Mah Ching Cheng noted that property securities generally have a low correlation with the broad equity index.

For example, the correlation between the Global Property Research Index and the MSCI World index of stocks was only 0.31 from 1996 to last year - meaning that broad price movements were very different between the two indexes.

'One reason for the low correlation could be that the property sector cycle tends to be different from the normal business cycle,' said Ms Mah.

She noted that since property is typically a laggard sector, except in certain markets such as Singapore, 'only when businesses pick up and profits start to improve a lot, do rental rates and property prices improve drastically'.

# Liquidity

AN OBVIOUS advantage of property securities is that they are more liquid and require less capital outlay than actual property, said Mr Peter Chiang, the chief equities strategist at DBS Asset Management (DBSAM).

However, investors should also be cautioned that property securities are still subject to fluctuations in the general equity markets.

Property stocks

IT HAS been hard to ignore the buzz among property stocks in recent weeks, particularly after prices of prime residences hit record levels in prime areas such as Orchard Road.

In a recent report, DMG & Partners said major developers with sizeable residential exposure in the Orchard Road belt that are set to gain from the expected rise in capital values include Wheelock Properties, Wing Tai and SC Global.

Property laggards that are still trading at a discount to their asset backing include Hiap Hoe and Soilbuild.

And landlords with the potential to enhance the value of their commercial property assets include Hong Fok Corp and Bonvests Holdings.

One cautious fund manager, Mr William Cai, warned that many stocks have risen though fundamentals are still weak.

'It's hard to find undervalued stocks today, but some counters - such as Macquarie International Infrastructure Fund, UOL and United Industrial Corp - have attractive price-earnings ratios and potential earnings,' he said.

Full-time investor Ang Hao Yao recommends that investors first check out which aspects of the property market the company is involved in.

The differences can be quite stark as some property firms hold property for rental while others engage in property development. Some do a mixture of both.

'It is important to identify what the main property business of the company is as this will have an impact on its earnings volatility,' said Mr Ang.

'I would expect the earnings of a property development company to be more volatile than those of a company whose main business is renting out property.'

Find out the debt levels and asset backing of the property company. The higher the firm's debt as a proportion of its assets, the more volatile an investor should expect its earnings to be.

And it would be risky to buy the stock of a property company whose total share value is way above the value of the firm's assets, Mr Ang added.

Unit trusts

THE number of property funds offered in Singapore continues to grow, and they invest in global, European and Asian equities as well as Reits.

Recent launches include Prudential Assurance's PruLink Global Property Securities Fund, which aims to ride on the commercial property upturn and achieve an annual return of 10 per cent to 13 per cent over the next three years.

It will invest mainly in Reits worldwide and is managed by LaSalle Investment.

A favourite among financial advisers is the Henderson European Property Securities Fund, a top performer that has achieved an annualised return of 32.2 per cent over the past three years.

For the 12 months ended April 17, its return was an impressive 41.25 per cent.


A REIT offers investors a hybrid between a stock and a bond.

Reits own a portfolio of properties and get income from rentals - then make regular payments to investors that are similar to dividends.

Since the first Reit was listed here in 2002, the Singapore Reit market has grown rapidly, with a total of 16 listed Reits here.

Though this market is nearing maturity and returns have fallen from the above-normal levels of 10 per cent to 12 per cent delivered in early years, Reits remain attractive, stable investments.

Mr Canter said Reits appeal to investors looking for stability of return.

'Investors can be confident that they are putting their money in a sector with strong and growing fundamentals, specifically rent and occupancy,' he said.

Reits provide a stable dividend, currently at 3.2 per cent a year, he noted.

Outlook for property securities

OVER the past decade, global property equities have delivered an average return of about 12 per cent.

Henderson attributed the robust performance to the recovery of office markets, the increasing penetration of Reits and the increasing number of property equity funds.

Although current valuations for property securities might appear to be running ahead of fundamentals, most experts are confident of low-double-digit percentage returns for the next few years.

This is because they believe the property sector will continue to enjoy strong occupancy and rental growth.

Mr Sumner expects global property securities to achieve a return of 10 per cent to 12 per cent a year on a sustainable basis.

This assumes balanced supply and demand in property markets, and sustained investment demand from institutional and private investors.

As for Asian property securities, the picture is rosy too.

Generally, they are expected to do well in the long run, driven by stronger economic growth and a growing Reits market, but they might face greater volatility.

DBSAM is 'still bullish' about Asian property over the long term - from five to 10 years - despite near-peak valuation levels for certain counters.

It sees healthy demand for commercial and residential space, amid Asia's rising affluence and industrialisation, which will drive up property prices and rental rates.

'Favourable demographic trends are underpinning asset reflation trends in Asia - such as rising affluence among the middle-class in China and India, migration of rural populations into the cities in countries such as Vietnam and Indonesia, and the liberalised immigration policy in Singapore,' said Mr Chiang.

He added that 'these favourable demographic trends in Asia' should last beyond a year and 'resonate through at least the next 10'.

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Healthy demand

'Favourable demographic trends are underpinning asset reflation trends in Asia - and these trends should last beyond a year and resonate through at least the next 10.'
MR PETER CHIANG, chief equities strategist at DBSAM

Buying equities

'I would expect the earnings of a property development company to be more volatile than those of a firm whose main business is renting out property.'
MR ANG HAO YAO, who says it is important to identify the main property business of a company as this will impact its earnings volatility