Omicron is just one of the challenges for real estate fund mega-returns

AMP Chief Economist Shane Oliver adds: “The recovery and therefore the easy gains are now behind us and, more importantly, interest rates and bond yields are starting to rise, which will likely put pressure on yield sensitive real estate funds.

Oliver says residential real estate markets are starting to slow down and the lasting impact of the pandemic “in terms of working from home and online retailing is not yet fully visible in commercial and office rents.”

Damian Diamantopoulos, property portfolio manager and head of property research for Australian wealth manager Unity, said he expects annual performance to return to total returns of around 9% ahead of the coronavirus, with income generating around 5%.

The main managed and exchange traded funds (the returns of which are shown in the attached tables) trade on the ASX, but are also invested in other listed real estate funds around the world.

Investments held by the VanEck Vectors FTSE International Property ETF, which has returned almost 43% over the past 12 months, include a wide range of global companies such as Prologis, a real estate investment trust (REIT) based in San Francisco which invests in logistics facilities and Simon Property Group, another US REIT investing in shopping malls and community / lifestyle centers.

Prologis and Simon Property Group are both listed on the New York Stock Exchange.

Arian Neiron, chief executive of VanEck, believes valuations have been fueled by unprecedented liquidity as governments and central banks flooded markets to spur growth during the pandemic. The fund is two and a half years old.

Neiron expects growth to slow down in the coming year.

VanEck also manages Australia’s top performing real estate ETF, based on holdings in AREITS such as Vicinity Centers (a commercial real estate group with $ 22 billion in commercial assets under management), Mirvac (a real estate conglomerate) and Charter Hall Group, which manages listed and unlisted real estate funds.

Top-performing managed real estate funds such as UBS Property Securities have also typically doubled their performance over three years with one-year returns of over 30 percent.

The UBS fund has a portfolio of 15 to 25 predominantly Australian real estate securities, typically AREITS, with around one-third in diversified trusts, 28 percent in retail and 24 percent in industry.

According to Paul Moran, financial advisor and director of Moran Partners Financial Planning, real estate trusts have generally been a critical component of many individuals’ investment portfolios, mostly between 5 and 10 percent.

But many investors make the mistake of confusing AREITS’s performance with that of residential real estate, which over the past 12 months has grown by more than 20 percent nationally.

“There are many differences between the two types of assets,” explains Moran.

For example, residential real estate barely dipped at the start of the COVID-19 crisis in February 2020 while AREITS plunged by around 35% over the next two months.

“So while REITS have returned to pre-pandemic levels, like much of the stock market, the volatility may come as a surprise. In fact, the index’s average price growth has averaged just over 3% over the past five years, with rental income making up the remainder of the total return, ”explains Moran.

He also cautions that recent academic research shows that many investors are overly influenced by recent performance, especially popular fictions that “property prices always go up,” which can have dire consequences for a portfolio in the event of failure. correction.

Zenith’s Higgins said the “juror was out” fearing the latest variant of the pandemic could lead to a new round of restrictions and closings, which have had a devastating effect on many rental and retail portfolios.

Leaders continue to discuss how the nation will coordinate its response to the variant, including potential changes to quarantine, travel and testing requirements.

“But retailers and office owners are going to be nervous just as there were signs that things might get back to normal,” he says.

Diamantopoulos says there could be curved balls as another pandemic variant.

“It could mean that all bets are off. But I don’t think we’ll revise the March 2020 lows. This time the vaccines are in place and the community is better organized, ”he said.

Inflation is another concern for investors, with the Consumer Price Index (CPI) rising 0.8% in September and reaching 3% year-on-year, pushing up costs in the economy. whole economy.

“Real estate is an imperfect hedge against inflation,” says Higgins. “It depends on how the real estate investment is structured and hedged against its potential impact.”

For example, some commercial rents are protected against inflation by annual indexation clauses that vary depending on whether they are indexed to the CPI or not, while other leases provide for fixed annual increases of between 2.5%. and 5%.

“Real estate assets are not static,” says Higgins. “Under normal market conditions, these programs are expected to exceed the rate of inflation in all but the most endemic epidemics.”

Another issue that quickly emerges concerns “responsible investing” and the measures needed to comply with the benchmarks used by institutional investors to assess whether AREITS is compliant.

According to the United Nations, buildings and construction account for 36% of final energy consumption and 37% of energy-related carbon dioxide emissions. He found that the standards did not correspond to best practices.

John Woods, head of asset allocation for Australian Ethical Investment, which manages approximately $ 6.5 billion, adds: “The real estate industry has been a major contributor to long-term returns. Properties that have invested in improving tenant outcomes, including focusing on reducing their environmental footprint, have benefited from greater support thanks to volatile demand caused by COVID-19. “