Mark Lister

On Investing

Mark Lister: Listed property firms outperform stock market

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Listed property investing is a way of reducing a porfolio's risk profile and of accessing better assets. Photo / Thinkstock
Listed property investing is a way of reducing a porfolio's risk profile and of accessing better assets. Photo / Thinkstock

So far this year, the New Zealand-listed property sector has returned 10.9 per cent from dividends paid and capital growth.

This is a strong return, considering financial market conditions, and is much higher than the -0.9 per cent return from the broader market (as measured by the NZX portfolio index).

During the past decade, the listed property sector also outpaced the broader market, posting an annual return of 9 per cent, compared with 7.1 per cent.

There are several listed property vehicles (LPVs) on the local market and all of these have a slightly different approach. They all qualify as portfolio investment entities and have the associated tax advantages, especially for investors on higher personal tax rates.

With the major LPVs paying a gross dividend yield of between 9 per cent and 9.5 per cent a year (depending on your personal tax rate), income investors are able to achieve quite attractive returns.

The underlying property portfolios range in size, with the largest being valued at more than $2 billion.

They typically invest in retail (shopping centres and retail shops), industrial (warehouses and storerooms), healthcare (hospitals and medical centres) and office property (CBD high-rise office buildings and suburban-style offices).

Some specialise in one sector, while others hold diversified portfolios across all of them. None invests in residential property, so any comparisons here between listed or direct property refer to commercial property investment.

Most invest only in New Zealand, with only Vital Healthcare investing internationally (about 40 per cent of its assets are in Australia). The other LPVs hold assets in most of the main centres, with Auckland and Wellington well-represented.

Most are buy-and-hold investors, so their income is largely derived from rent collected from tenants.

This rental income (after property management fees, interest and tax have been deducted) is distributed to investors on a regular basis by way of a dividend. Rental growth in the underlying assets should lead to increased rental income and increased dividends over time.

LPVs generally use an element of debt funding within their balance sheets, usually about 30 to 40 per cent. The portfolios are revalued on an annual basis, although capital gains are usually not distributed to investors.

In most cases, LPVs trade close to the value of the underlying assets so any increase or fall in the value of the portfolio is reflected in the trading prices of the securities.

Some may trade at prices above or below the value of the underlying assets, which reflects the markets' view on future growth opportunities, quality of management and different risk profiles of each entity.

Generally, those with a superior track record, higher-quality buildings and better growth prospects trade at lower dividend yields.

Although most are passive long-term investors, some do undertake property development projects. These are usually on a modest level, such as through refurbishments or the expansion of existing assets. With larger projects, a significant level of leasing is usually agreed in advance.

The benefits of direct property investment are well-known. Using borrowed money to boost returns, adding value through restorations or by introducing better tenants and having full control over the cash flows and structure are a few of these.

There are also some benefits to investing in listed property, especially for those who have small amounts of capital or lack the expertise (or the time) to be a commercial landlord.

Firstly, listed property makes it far easier to reduce the risk profile of a property investment portfolio.

Rather than being exposed to one, two or even 10 buildings and their tenants, investors in listed property are spreading their exposure over billions of dollars worth of property across the country, reducing risk as the spread of tenants, buildings and geographies is much higher.

The ability to access a much higher-calibre asset is also important. AMP NZ Office has a portfolio of prime office assets with an average value of $90 million per building. This end of the market is unattainable for most investors.

The same is true for high-quality retail assets such as Sylvia Park in Auckland, owned by Kiwi Income Property Trust and worth $474 million. Management of the portfolio, including re-leasing, rent reviews, acquisitions and developments, is done by large teams of property professionals with a range of skills and experience the individual may find hard to match.

Lastly, but very importantly, listed property has more liquidity. Investors can buy or sell some or all of their holding quickly and easily. Liquidity is often underestimated but, if circumstances change, it can be vital to be able to sell an investment in a timely manner at a fair price.

This is a key area that separates the listed property sector from a property syndicate. A property syndicate is similar, as it involves a group of investors buying a building jointly. But the minimum investment is usually higher and, because they are unlisted, if an investor wants out it can be difficult to achieve this quickly or efficiently.

Some syndicates have worked well and some operators are good, although listed property shows improved governance, larger and higher-quality portfolios, more transparent financials and improved liquidity. Most New Zealand LPVs outsource management as opposed to being internally managed with in-house employees.

In principle, I prefer internal management because it is cleaner, more transparent and management's interests are fully aligned with shareholders.

However, external management offers benefits in some cases.

With an LPV such as Goodman Property Trust, it could be argued that being externally managed by an international property specialist has been an advantage.

That relationship has directly led to several international tenants being secured locally and it has also meant the development business has access to the resources of an international team.

In recent years, we have seen a move towards internal management structures, although this has not yet translated into significantly better returns and, in some cases, the costs of buying the management contracts have been substantial.

Property is an important investment option that provides a reliable income backed by a tangible asset. Listed property can offer improved diversity and liquidity, while still providing diversification from the broader equity market.

With interest rates looking as if they may remain low for an extended period, listed property may be an appealing investment proposition for some time.

Mark Lister is head of private wealth research at Craigs Investment Partners, which holds securities in all of the LPVs mentioned above on behalf of clients. His disclosure statement is available free of charge under his profile at www.craigsip.com. This column is general in nature and should not be regarded as personalised investment advice.

- NZ Herald

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